The dismal decade (Part 4: The economic race: Can China catch US by 2030)

The dismal decade (Part 4: The economic race: Can China catch US by 2030)

Phuah Eng Chye (30 March 2024)

Where it once appeared inevitable, it is no longer a certainty that China will be able to overtake the US as the world’s largest economy (in nominal terms) in 2030. Most agree China’s peak real GDP growth of 8-10% is behind it but opinions are sharply divided on the future. China-leaning economists believe China can sustain real GDP growth of around 5%. Under this scenario, China could likely catch up with US with assistance from an appreciating yuan and easing US inflation. Western-leaning economists believe China’s growth could taper to 1%-3% or even stagnate. Under this scenario and if US can maintains its recent performance, it is likely to preserve or widen its lead over China well into the next decade.

China’s official forecasts tend to follow the lead of President Xi Jinping who set a goal of doubling China’s GDP by 2035. This translates into an average growth rate of 4.7%[1]. Most China-leaning forecasts believe there is sufficient government policy resolve and domestic dynamism to achieve this goal. Yu Xiangrong[2] thinks “China is seeing a dual-track recovery” and the contributions of three new powerhouses – technological innovation, advanced manufacturing and modernised infrastructure – could approximate that of the property sector. But for the pivot to a new growth model to take place, both the supply and demand sides would have to contend with throes of a deep, profound change and transition”.

Others are sceptical. Though China’s real GDP growth came in above the 5% target in 2023, Han Yong Hong cautions “China’s three core growth engines – infrastructure investment, real estate development and exports – are losing steam”. Growth in fixed-asset investment (including infrastructure construction) of 5.9% and exports of 0.6% fell short of expectations. Measured in US dollar terms, exports fell 4.6%; its first decline since 2016. In 2023, property investment fell 9.6% and property sales by floor area fell 8.5%.The only bright spot was retail sales of consumer goods which climbed 7.2% in 2023. Despite official narratives, “the market does not think there will be any sustained improvement in the Chinese economy anytime soon. Structural problems such as the lack of domestic demand in the Chinese economy, the pangs of economic transition, geopolitical risks, and the lack of confidence have left no room for optimism”. Doubts flagged at the Central Economic Work Conference held in mid-December 2023 “include insufficient effective demand, weak social expectations, impediments to domestic circulation, complex, severe and uncertain external environment and so on. All this makes it clear that the Chinese economy is caught in a conundrum due to both internal and external factors. Domestically, poor economic revitalisation among other reasons makes it hard to improve weak investor and consumer confidence; internationally, technological decoupling by the US on China and friendshoring measures in manufacturing have struck a critical blow at China’s export advantage, weakening China’s position in the international supply chain. China was once convinced that foreign investment could not leave China, but this turned out not to be the case…the situation in 2024 will only get more difficult. First, the real estate sector would be unable to rise above the doldrums in the short run, while the decoupling measures and tech blockade that the US has adopted towards China is only the beginning, while the Red Sea crisis means shipping costs have skyrocketed, which will add to the problems for China’s exports. The Chinese government has pinned their hopes on the green energy sector which includes electric vehicles and new energy and materials. While performance has been stellar for the last year or so, in the short term it cannot take the place of the real estate sector in plugging the gaps in economic growth and unemployment. For China’s economic growth in 2024, most international firms have predicted a growth of 4.5% to 4.9%, lower than that in 2023”.

Frank Chen notes “China’s 5.2 per cent rise in gross domestic product (GDP) last year, despite beating its annual target and still well outpacing growth in developed Western countries, has yet to convince the market that all is well in the world’s second-largest economy, according to observers. And the race is on as policymakers grapple with the ramifications of four distressing “D’s” – debt, deflation, de-risking and demographics – that continue to bog down the 126-trillion-yuan (US$17.67 trillion) economy at the starting blocks of 2024”.

The International Monetary Fund (IMF) estimates China’s growth will “slow to 4.6 percent in 2024 amid the ongoing weakness in the property sector and subdued external demand. Over the medium term, growth is projected to gradually decline further and is projected at about 3½ percent in 2028 amid headwinds from weak productivity and population aging. While inflation fell in 2023 largely on account of lower energy and food prices, it is expected to increase gradually to 1.3 percent in 2024 as the output gap narrows and the base effects of commodity prices recede. Uncertainty surrounding the outlook is high, particularly given the existing large imbalances and associated vulnerabilities. Deeper-than-expected contraction in the property sector could further weigh on private demand and worsen confidence, amplify local government fiscal strains, and result in disinflationary pressures and adverse macro-financial feedback loops. Greater-than-expected weakening of external demand, tightening of global conditions, and increased geopolitical tensions also pose considerable downside risks. On the upside, decisive policy action, including faster restructuring in the property sector, could boost confidence and lead to a better-than-expected rebound in private investment”.

Using a model based on “Solow’s convergence theory, which is based on the assumption that poorer countries grow relatively faster than richer countries and that growth rates will converge in the long run”, Alicia García-Herrero “find that China’s average growth rate should stand at 4.9 percent from 2021 to 2025, and at 3.6 percent from 2026 to 2030”. Based on the average growth rates of other countries in the 10 years after they reached the $10,000 GDP per capita threshold, “only two countries were able to continue growing at a rate of at least 4 percent after surpassing $10,000 per capita: South Korea, with 5.5 percent average GDP growth from 1994 to 2004, and Japan with 4 percent average GDP growth during the 1980s. The average growth rates of all other countries in the ten years after they surpassed $10,000 per capita was much lower, with Poland (3.6 percent) closest to Japan’s rate. “China’s growth rate should continue to slow to 2.4 percent by 2035. Notwithstanding such deceleration, China should be able to escape the middle-income trap as its income per capita should exceed $20,000 by a large margin”.

Alicia García-Herrero argues “based on the reasonable growth rate estimates, China should reach $20,000 per capita in 2030 (ten years after it reached $10,000 per capita). The above long-term forecasts of China’s GDP growth rate and estimates of its GDP deflator can be used to gauge whether China’s GDP will surpass that of the United States in the foreseeable future. The results show that China’s economy will amount to about 200 trillion renminbi (in current prices) in 2035, which approximately doubles the current level. Using the average exchange rate of the past few years (6.5 renminbi to the dollar) 200 trillion renminbi will translate into $30.1 trillion. Because the US economy was $23 trillion in 2021, and is already at the frontier of the global economy, we assume an average 2 percent real growth rate for the next 15 years for the US, bringing US GDP to about $30 trillion in 2035. Based on these assumptions, Chinese GDP would converge with that of the US in the next 15 years, but would not surpass it substantially. From 2035, growth rates for China and the US will be similar, meaning that neither of the two economies would significantly overtake the other”. She thinks “aging will hardly be a factor in explaining growth deceleration up to 2035 thanks to the remaining scope for urbanisation in China. From 2035 onwards, aging will contribute much more intensively to further deceleration of China’s growth rate, as urbanisation will have been completed and because the recent further decrease in the birth rate which started in 2017 will start to bite. From 2035 onwards, aging should cut 1 percentage point annually from the growth rate…aging will impact productivity”. “A second drag could be the increasingly low return on assets, which seems difficult to reverse”.

A Rhodium Group report[3] warns China’s growth “could slow to just 3 to 4 per cent in the coming years unless the nation addresses structural problems…Policymakers did next to nothing to tackle real structural problems”. “Its economic performance was particularly weighed down by some underlying problems resulting from years of large-scale credit and investment expansions. Moreover, China is facing growing export controls in some sectors and weak domestic demand that have raised questions over its position as the world’s leading manufacturing destination for foreign firms”. “In the quarters to come, property will shift from a massive drag to a modest boost to GDP growth, though from a much lower base…We expect this stabilisation due to the three years of destocking that have already taken place, bringing the real estate industry near a long-term equilibrium level of activity.” “While cyclical conditions will stabilise this year, Beijing must soon acknowledge that slower growth, in the 3 per cent or 4 per cent range, is here to stay”.

However, there are doomsday narratives being parroted. These narratives are critical of Xi Jinping’s authoritarian leadership; and argue that his reversal on market reform and increasing reliance on state-led intervention is casting uncertainty on China’s future. Private industry is being sidelined by social and business clampdowns and foreign businesses deterred by national security crackdowns. Consumer sentiment and spending is undermined by the draconian zero-Covid policy, the feeble post-Covid recovery and the failure of government interventions to revive the property and stock markets. The misallocation of capital into state-owned enterprises (SOEs) and unproductive projects add to China’s high debt burden and will culminate into economic sclerosis or a financial crisis. In the meantime, geopolitical relationships are deteriorating. Decoupling is spreading across and deepening with the West and affecting China’s trade and capital accounts.

China-leaning economists have a different perspective. Han Feizi notes cynically that Western media tend to echo the narrative that “China’s investment and export-led model has finally run its course. Not only that but the model had been taken to such extremes that the rebalancing must be brutal. Proof is everywhere. The property sector is on its knees. Infrastructure debt has paralyzed local governments. Exports have peaked and are declining. If only China could stop squeezing its long-suffering households, consumption could become an engine of if not growth then at least stability”.

China’s Ministry of State Security has called these criticisms fabrications with ulterior motives. A Global Times editorial pointed out that “quite a number of analysts have forecast that China’s economic slowdown means it will take more time for it to surpass the US to become the largest economy in the world. If anything, the Western focus and discussion about the timing of China’s GDP surpassing that of the US reflects Western anxiety about the Chinese economy becoming the largest in the world, because it will justify the path of Chinese modernization”. Global Times explain “China is not impressed by such GDP comparisons…shift in focus is necessary because after reaching a certain level of development, the Chinese economy is facing challenges and bottlenecks that cannot be solved by simply pursuing rapid growth, but instead by requiring high-quality development through structural adjustment and transformation. It is true that the Chinese economy is undergoing pressure and experiencing difficulties due to internal and external factors, but that hasn’t changed the long-term positive trend of China’s economic fundamentals…China’s economy is so large that it has ample space to absorb and address difficulties while maintaining stable growth…some bright spots. For example, high-quality development recorded steady progress, with high-tech industries showing strong momentum in terms of investment and sales. Also, consumption was a much stronger driver of economic growth. Most importantly, the government adopted flexible measures to avoid strong stimulus while addressing challenges facing the economy in a timely and effective manner…Anyone who wants to make a reasonable and objective forecast of China’s GDP growth and economic development must first realize that the Chinese are taking a completely different road to modernization from the West”.

Early 2024 data supports the official view. Li Xuanmin and Ma Jingjing reported “China’s economy starts off 2024 on strong footing, with an array of key indicators in the first two months beating market expectation by a wide margin, fueled by a spending spree in the Spring Festival holidays, ramped-up efforts in building new quality productive forces and the effects of macro policies implementation”. “The industrial output grew 7 percent year-on-year in the first two months…the fastest since March 2023”. “In January-February period, retail sales expanded 5.5 percent from the same period last year…while fixed-asset investment also gained 4.2 percent in year-on-year terms”. “During the eight-day Spring Festival holidays in February, nationwide domestic tourism reached 474 million trips, an increase of 19 percent compared with pre-COVID level in 2019, while total expenditure amounted to 632.7 billion yuan, up 7.7 percent from the same holiday period in 2019”. “In January-February period, investment in high-tech industries rose 9.4 percent year-on-year, a drastic rise that aligns with this year’s economic blueprint”. However, “In the first two months, China’s property investment dived 9 percent year-on-year”.

The debate on China’s economic prospects is thus evenly divided among the different camps. I think the greater risks to China’s growth rate  lies over the next two years – due to economic fallout from its severe over-capacity problem which might have a dampening effect on global economic growth. Where I differ substantially if that I think it is erroneous to assume China’s growth will taper towards 1% in subsequent years. Actually, China is still a middle-income country and a re-acceleration in its growth rate during the second half of the decade is  likely. I explore the different aspects of the China growth controversy in greater detail below.

China’s property crisis, NPLs and impact on economic growth

Yi Xianrong notes “the real estate market underwent major changes in 2022, with property investments declining by 10%, the worst record in more than 20 years. Home sales fell by 28.3% back to 2017 levels; residential new constructions measured by floor area declined by a record 39.4%; personal mortgage loans were down 26.5%, marking a weakening buyer demand; while the growth in local government land transfer fees slumped by more than 40% – the decline would have been worse if not for the land-buying spree by local government-backed investment companies”.

Views vary on the threat posed by the property crisis and on the government’s handling of property-related risks. A 2022 IMF report highlights “as of November 2022, developers that have already defaulted or are likely to default – with average bond prices below 40 percent of face value – represented 38 percent of the 2020 market share of firms with available bond pricing. Despite these strains, the pace of restructuring has been slow, partially hampered by the potential for very large losses for pre-sale homebuyers due to the large backlog of troubled projects. The sector’s contraction is also leading to strains in local governments. Falling land sale revenues have reduced their fiscal capacity at the same time as local government financing vehicles (LGFVs) have also significantly increased land purchases”.

The IMF notes “the authorities were of the view that the problems in the real estate sector remained broadly contained and they were taking strong action. They noted that excessive leverage and weak governance of several large real estate firms had strong spillover effects on the broader property market since the second half of 2021, which were exacerbated by other factors such as the impact of COVID. They expected successive rounds of policy support led by local governments, which have a key role in China’s system of regionally differentiated real estate regulation, to have a gradual but cumulative effect on the market, with signs of stabilization already emerging in the third quarter of 2022”. “The authorities assessed the banking sector to be generally healthy…banking sector exposures to property developers were limited and that mortgage risk was low due to high prudential requirements and the lack of financial leverage. The overall capital level of the banking system is relatively high…they continuously monitor and pay close attention to the potential impact of pressure on the profitability of real estate enterprises. On leverage, the authorities emphasized that the private sector debt-to-GDP ratio had been on a downtrend in recent quarters, despite temporary increases due to slower growth”.

The 2023 IMF report suggests “the ongoing housing market downturn poses rising asset quality risks to Chinese banks. Despite continuing developer defaults on bonds, the asset quality risk is not yet fully recognized amid the extended regulatory forbearance…While manageable in the aggregate, credit risks from developer loans are significant at smaller banks. In a mildly severe scenario – assuming 30 percent of loans from distressed property developer and 10 percent of the mortgages from the associated unfinished pre-sold properties become nonperforming – the NPL ratio on property loans could rise from 4.5 to 10 percent. Under this scenario, about 40 percent of smaller banks by assets and some domestic systemically important banks (D-SIBs), will fail to meet the minimum capital requirement. In a severe scenario, where the NPL ratio on property loan rises to 20 percent, over half of smaller banks and D-SIBs by assets would have capital shortfall in the amount of 160 and 80 basis points in CAR, respectively. In both scenarios, global systemically important banks (G-SIBs) have enough capital buffers to absorb the potential credit losses. Reprofiling LGFV debt would require banks to absorb moderate initial losses but would not address LGFV’s viability problems. About two thirds of the total LGFV debt is in the form of bank loans. One third of the LGFVs are commercially nonviable, with interest coverage ratio below 1 for the last three years. In a hypothetical scenario where all bank loans from commercially nonviable LGFVs are reprofiled as in the recent experience in Guizhou province the banking sector would absorb impairment charges of RMB3 trillion, equivalent to an aggregate 1.4 percentage points reduction in CAR. However, this scenario does not address the fundamental viability problem of LGFVs and could erode investor confidence in the banking system. Debt write-down will be needed to restore LGFV debt sustainability, accompanied by complementary measures to ensure financial stability. In hypothetical scenarios where some portion of the LGFV debt is written down and the losses are absorbed across LGFVs’ stakeholders based on the established hierarchy of claims (see accompanying LG SIP), the credit losses to the banking system could be substantial. Larger shortfalls would fall on D-SIBs and smaller banks, particularly those from fiscally weaker regions, while half of G-SIBs would exhaust capital conservation buffer”.

Some economists have a more pessimistic view. Tyler Durden argues “accelerating turmoil in the property market is further evidence that fiscal and housing stimulus to reboot the economy has failed so far, and perhaps a depression is unavoidable. Another concern is that local government debt has surged due to plummeting land sale revenues from the property downturn and pandemic lockdowns. This raises fears of a broader financial crisis. Additionally, there are mounting worries in China’s $3 trillion shadow banking sector, primarily because of bad property investments”. This combined with the broad economic deceleration, and China’s record debt load of well over 300% of GDP “led Moody’s Investors Service to downgrade China’s sovereign credit rating outlook from stable to negative”. The rating agency “was concerned that government and state firms would provide fresh financial support to weak regions in the country, posing broad downside risks to China’s fiscal, economic and institutional strength”. Nevertheless, Moody’s affirmed its A1 rating to reflect “China’s financial and institutional resources to manage the transition in an orderly fashion”. China’s Finance Ministry called Moody’s decision disappointing and its concerns about the country as unnecessary.

Alicia García Herrero points out “bursting real estate bubbles never come alone. This is the experience of the US with the sub-prime crisis in 2007, but also that of Spain and the UK slightly later. Japan also had to pay a very high cost from the bursting of its real estate bubble in the early 1990s but in a much more protracted way. China’s situation is clearly more similar to that of Japan, because like Japan, China is an external creditor. This means that the real estate sector did not expand by borrowing from overseas, but was financed by domestic savings. In that regard, the risk of a sudden stop in a risk-off environment is very limited unless Chinese households decide to sell off Chinese assets. This is even harder in China than in Japan due to capital controls, and this did not even happen in Japan, so the risk of a balance of payments crisis in China is very low”. Nonetheless, “the dangerous link between the demise of China’s real estate sector and shadow banking has become painfully apparent as Zhongrong Trust, a large asset management company with the equivalent of US$87 billion under management, missed payments on its wealth management products (WMPs) to retail investors. This has generated additional worries about the impact of the bursting of the real estate bubble, not only on the real economy but also on the financial sector”. “While the structural consequences of a disinflating real estate bubble cannot be avoided (lower growth and deflationary pressures), Chinese policy makers should focus on limiting potential spillovers into the financial sector and thereby systemic risk. The longer they wait to do so, the bigger the cost will be”.

Views diverge on the impact of the property downturn on China’s economy. Kenneth Rogoff observes “in 2021, the direct and indirect impact of real estate in China’s economy was 22% of GDP, or 25% when factoring in imported content. If infrastructure such as roads, mass transit and water pipes that service residential and commercial real estate is included, the total rises to 31%. In the years immediately before the Covid-19 pandemic, the total was even higher. The only advanced economy in recent history with a similar share of real estate plus infrastructure investment in GDP was Spain during the run-up to the Global Financial Crisis, though that peaked below the 30% level that China has now sustained for a decade”. While he did not think this would result in China’s economy meltdown “but it will not be easy to manage these problems, the remedies may be difficult, and the end result is likely to be much slower trend growth”. He adds “as the stock increases, the economic returns to construction decline. For example, floor area per capita of housing in China is now equal to or greater than France or the United Kingdom. While the United States’ housing stock remained stable at 65 square meters per capita from 2011 to 2021, China’s housing stock increased from 5 square meters per capita in 1992 to almost 49 square meters per capita in 2021. 80% of that floor space is in smaller, poorer Tier 3 cities, which have not benefited nearly as much from agglomeration effects as the richer, more prosperous Tier 1 cities like Shenzhen, Beijing, Guangzhou and Shanghai, and mid-ranked Tier 2 cities. Tier 3 city populations are already in decline, prices are falling and vacancies in many regions are high…Nationally, the ratio of real estate under construction to completed commercial real estate has been steadily increasing, suggesting a market in which developers cannot complete projects due to a lack of final buyers and funding”.

China-leaning economists offer a different perspective. Weijian Shan thinks China’s “real estate sector, which directly accounts for 11% of GDP (and indirectly for about 25%), has far underperformed other sectors of the economy, which have more or less resumed their pre-pandemic growth trajectory. China’s real estate sector in fact has been a negative contributor to China’s overall economic growth since 2022 and a driver of the recent economic slowdown. While the property sector is the biggest drag on the economy, its woes may be tapering off…the sector’s negative contribution to GDP growth has narrowed from about 4% in 2022 to less than 2% in 2023”.

Weijian Shan also disagrees that the bankruptcy of property developer Evergrande is “China’s Lehman moment – referring to the demise of the once venerated American bank which triggered the 2008 Financial Crisis”. He argues this is unlikely because “the average loan to value ratio of mortgages in China’s major cities is about 40%, which means that housing prices will have to fall more than half to produce negative equity for homeowners”. “Moreover, Chinese homeowners cannot simply walk away from their mortgages if that happens, as homeowners can in the United States. In mainland China, as in Hong Kong and Australia…mortgages are unlimited personal liabilities. That is why during the 1997 Asian Financial Crisis, there was plenty of negative equity in Hong Kong’s housing sector, but not a single bank failure. In fact, the Chinese banking system has experienced an opposite problem – too much cash from prepaid mortgages and above-normal savings. Prepaid mortgages amount to 12% of all mortgages in the banking system since 2022. Household savings increased more than their normal levels by RMB18 trillion (USD2.5 trillion) in 2022 and RMB12 trillion (USD1.6 trillion) just in the first half of this year. Residual loans to property developers represent less than 6% of the loan book in the banking system, and all of those loans are secured by collaterals. Chinese banks are well capitalized, with an average capital adequacy ratio of more than 15%, and their average non-performing loan (NPL) ratio is about 1.6%. Yes, NPLs have been rising in recent years. But banks are selling or writing them off quickly because the regulatory requirement in China for setting aside reserves to cover NPLs is more than 100%, more than any other country I know of. Therefore, it is just not worth it for Chinese banks to hold onto NPLs”. Thus, “China’s real estate issues will not infect the banking system as a whole”.

Yan Liang agrees the financial risks can be contained. “First, direct bank financing for real estate developers accounts for 2.5–3% of total bank loan balances, home buyers account for 80% of housing-related debt and the historical default rate for mortgages is only 0.5%. Second, unlike Japan in the 1980s, Chinese companies have not extensively used real estate as collaterals and unlike the 2008 US subprime mortgage crisis, China’s real estate industry has not experienced large-scale subprime lending or financialization. Finally, as a large proportion of the real estate industry’s debt is domestic debt denominated in renminbi, the People’s Bank of China and state-owned asset management companies can provide necessary liquidity or capital to support banks when needed”. “The real estate sector’s balance sheet has shrunk by 1.7 trillion yuan (US$240 billion) – a mere 1.4% of GDP. It is unlikely that the real estate sector will trigger a widespread financial crisis.

David P. Goldman thinks “there’s no financial crisis in China, just a political standoff over local government finances…There are between RMB 35 trillion and 70 trillion in off-the-books government financing through local government financing vehicles (LGFVs) and other instruments, according to the IMF. Assume an RMB 50 trillion float and an extreme 20% default rate, or RMB 10 trillion of non-paying bonds. At the current yield of quasi-governmental bonds, that’s RMB 250 billion in skipped coupon payments, or about 1% of China’s central government revenues in 2022. In an extreme hypothetical case of mass local government defaults, the cost of transferring the cost of debt service to the central government would be trivial compared with overall government revenues…State-owned enterprises belonging to local governments have estimated assets of about RMB 210 trillion, which can be sold over time to pay down debt. Even assuming a significant drop in property prices, SOE assets more than cover local government debt. Compare this with the 2008 crisis in the United States, where the market value of about $2 trillion in securitized mortgages and home equity loans fell by more than half, leaving the banks insolvent on a mark-to-market basis…Mortgage balances in China amount to less than 40% of the value of the financed property, according to the IMF. Compare this with the United States in 2008, where the average loan-to-value ratio for conventional single-family mortgages was close to 80%, and nearly 30% of newly-issued mortgages had loan-to-value ratios of more than 90%. US banks issued 5% down mortgages, zero-interest mortgages, and other highly-levered forms of financing that left homeowners without a cushion when the housing market imploded. Despite these enormous differences, US think tanks draw parallels to the 2008 crisis. A recent Council on Foreign Relations report states: A PBoC survey of urban households conducted in 2019 revealed that the value of housing composed 59 percent of households’ total assets, while mortgage loans stood at 12 percent of total assets. These figures are similar to the United States in 2008 on the eve of the subprime mortgage crisis. That’s true, but misleading: China has no subprime market. It has a small fraction of mortgages issued with a 20% down payment, and an average equity cushion of about 60%”.

On the government’s handling of the crisis, Yi Xianrong notes “the Central Economic Work Conference (CEWC) called for effectively preventing and defusing major economic and financial risks and affirmed the goal of mitigating risks and ensuring the delivery of housing projects”. “The Bank of China and the China Banking and Insurance Regulatory Commission…announced the plan to emphasise reviving assets, sustaining mortgage payments, boosting equity financing, and raising buyer interest. The focus will be placed on property companies that concentrate on their core business, comply with regulations, and have good credit and a workable system in place. Comprehensive policies will be introduced to improve operational and investment cash flow to bring their balance sheets back on track…identifying at-risk property companies and to weed out bad property companies through marketisation and rule of law, and hitting out hard at the illegal practice of amassing funds through property sales”. He expects the 100,000 property companies operating in China would be pruned.

Global Times notes “Sunac China Holdings became the nation’s first large real estate enterprise to wrap up a domestic and overseas debt restructuring. The company restructured about 90 billion yuan ($12.65 billion) in troubled debt, reduced its total debt by $4.5 billion, and is poised for an improvement in its operational fundamentals. This landmark development provides a crucial demonstration for other debt-burdened developers…Since the second half of 2021, more than 50 listed real estate enterprises have initiated debt restructuring processes”.

Nicholas R. Lardy points out some favorable developments may have been overlooked. “In 2023 completions of residential property rose by 17 percent, totaling nearly 725 million square meters, outstripping the pace of new residential starts for the first time ever. If this trend continues, it will help restore confidence in the property market, leading to a more sustainable pace of development”.

Yao Yang argues “the so-called risks of China’s real estate industry have been blown out of proportion”. “Admittedly, both the supply side and the demand side face near-term challenges. However, the current downward pressure on China’s real estate sector is the result of the proactive regulation and adjustments. To tame the risks resulting from overheat and speculation moves in the sector at the time, related authorities have adopted strict rules, especially in terms of credit. This doesn’t mean that there is a lack of demands in the market. It is completely different from Japan in the 1990s. When policy priorities shift, market sentiment in China’s real estate sector will turn optimistic, and the industry will pick up accordingly”. Yao Yang notes “reports that China’s real estate sector has shown recent signs of recovery with the introduction of a series of optimization policies. In the past few days, many second-tier cities have introduced policies to cancel purchase and price restrictions, which is expected to generate a great boost on consumer confidence. Hopefully, there will be following measures on the supply side…As the recovery trend is getting clear, at the very least, the sector is expected to reverse the negative growth and bottom out soon, which may happen at the end of the year”.

Had China’s government not taken the initiative to pre-emptively burst the property bubble, the outcome would probably have been worse. The consensus is that China’s property sector will remain in the doldrums. The disagreement is between: (1) Western-leaning economists who think the consequences are dire and that large scale stimulus are needed to prevent its effects from spilling over into consumer sentiment, debt markets and the financial sector and; (2) China-leaning economists who think the property fall-out is reaching a bottom soon and that interventions should be limited to ensuring that the property crisis does not trigger contagion. There seems to be consensus that the level of balance sheet impairment is nowhere as severe as it was in Japan. And for investor confidence to recover, China needs greater transparency and consistency in its market clearing and debt resolution processes.

China’s debt – Data discrepancies and divergent views

Whose data and arguments should you believe? According to IMF’s Global Debt Monitor, China’s total debt reached 272 percent of GDP in 2022. Public debt reached 77 percent of GDP while private debt increased 195 percent of GDP. Overall, total debt in 2022 rose 25 percentage points of GDP above its pre-pandemic level. “China has been an important force driving global debt in recent decades…China’s total debt-to-GDP ratio increased almost four-fold from around 70 percent, in mid-1980s, close to the average EM levels then, to 272 percent of GDP, close to the U.S. level in 2022. In dollar terms China’s total debt (USD 47.5 trillion) is still markedly below that of the United States (close to USD 70 trillion), though…Over half of the increase in the global debt-to-GDP ratio in the period 2008-2022 can be attributed to the rapid increase in China’s debt-to-GDP ratio above the rest of world”.

In contrast, Weijian Shan argues “much ink has been spilled by the world’s pundits about China’s government debt. In truth, Chinese central government debt represents only about 21% of GDP. Local government debt, of course, is what has been getting all the attention. But estimates for these obligations range only from 50% to 80% GDP, including hidden liabilities. If we take the highest debt-to-GDP ratio of 110% for China’s overall government debt, it still compares favorably with that of the U.S. federal government, which is about 140% of GDP, and with Japan’s central government debt of about 260% of GDP. Furthermore, the financial assets owned by the Chinese government exceed its total financial liabilities, as IMF’s study shows. The net asset value (NAV) – total assets minus total liabilities – of China’s state-owned enterprises (SOEs) represents about 70% of GDP. The country’s privately-owned enterprises trade in the stock market at a median price-to-NAV multiple of 5.4 times. If we apply only 2 times to SOEs which are considered less efficient, the market equity value of SOEs amounts to about 140% GDP, exceeding the total debts, by their broadest measure, of the central and local governments by about 30% GDP. It should be noted that almost all of the Chinese government’s debt is in local currency. Its foreign currency denominated debt is negligible as a percentage of GDP. It should also be noted that not counted in these calculations are China’s vast land and natural resources, all of which are government-owned. Therefore, the fiscal policy of the Chinese government has plenty room to expand”.

In its 2023 report, the IMF notes “debt in China has continued to rise and surpasses levels observed in other emerging market economies. Debt levels have been elevated in international comparison across all sectors: the general government, households, and nonfinancial corporates. While some deleveraging took place before the pandemic, aggregate debt-to-GDP ratios have further increased since then. Against these high levels of debt, could deleveraging to repair balance sheets among nonfinancial corporates and households explain some of the ongoing domestic demand weakness in China? Firm level data shows nonfinancial corporate sector leverage has further increased since the start of the pandemic, while non-property private investment continues to grow steadily. The increase in leverage is driven by private firms and local SOEs, including LGFVs – where leverage ratios have continued to rise from already elevated levels. Overall, firms that have reduced their debt levels and lowered investment seem to be mostly those with falling profits – suggesting cyclical weakness as a main driver more so than balance sheet slowdowns. In the aggregate, private investment other than real estate, especially in manufacturing, continues to grow. The accumulation of household debt has been slowing in the aggregate since the pandemic while household saving ratios rose and returned to pre-pandemic levels only recently. Rather than balance sheet repairs, the driving factors seem to be a precautionary savings motive amid volatile income during the pandemic in the face of an incomplete social safety net, and spillovers from the weak property sector on the debt side. Individual residential mortgage growth has turned negative due to lower housing sales and surging prepayments amidst falling interest rates. Even in the absence of widespread balance sheet deleveraging, policies should address key pressure points, particularly in the property sector and among LGFVs. Overall, developments in both the nonfinancial corporate sector and among households suggest factors other than widespread deleveraging are posing headwinds to growth, including spillovers from the property sector, concerns around highly indebted LGFVs, weak confidence and pandemic scarring. Going forward, risks of broader deleveraging by healthy firms remains a concern, particularly in the context of weaker growth and lower earnings and/or intensifying disinflation. Policy should focus on supporting the recovery in the short-term, addressing the property sector downturn and limiting its spillovers, while rebalancing the economy and lifting potential growth in the medium- to long-term”.

Alicia García-Herrero notes “China’s total public debt has reached 97 percent of GDP, which stands out for a country of China’s income per capita, especially because data constraints mean the debt of SOEs is not included in this calculation. It should be noted that the piling up of public debt does not need to harm potential growth as it depends on how the many is spent. Given that LGFVs finance most of the investment carried out by local government, one could imagine that their return on assets should be higher than for other public debt. However, the average return of LGFV projects has declined to a very low level and is decreasing, especially in the context of China’s average interest rates in the last few years. The average rate of return on assets of the LGFVs was 1.8 percent in 2017 but dropped to 1.3 percent in 2022”.

Han Feizi points out China’s debt levels are over-estimated. “China’s reported GDP would be 25-40% higher if calculated using strict United Nations System of National Accounts (UNSNA) standards. Restructuring property sector and local government debt should be more manageable with a debt-to-GDP ratio of 220-250% rather than the 308% reported by the Bureau of International Settlements (BIS)”. Arthur Kroeber[4] thinks debt is not an insurmountable problem as “the structure of debt in China is largely fragmented. Unlike Japan, where cross-shareholding structures between banks and corporations were ubiquitous, Chinese policymakers have been careful to ensure that the corporate and financial systems remain separate…if certain sectors experience debt-related issues, the broader economy is likely to be shielded from a major downturn”. While China’s debt is higher than other emerging economies, it is at levels comparable with major economies.

China’s government is pro-actively managing non-performing loans. William Pesek notes “between 2016 and 2022, Xi’s team has disposed of bad bank debts equivalent to roughly 13% of China’s GDP”. The PBOC reports that as of June 2022, Beijing’s efforts to modernize the financial system halved the number of severely weak lenders to 337. About 96% of these institutions were rural credit cooperatives and commercial banks. Some were county and village banks”. Recently, plans “to merge hundreds of rural lenders into regional giants”, possibly affecting about 2,100 rural banks were announced”. Moody’s Investors Service “reckons that urban and rural commercial banks and regional lenders more broadly hold 25% of mainland banking system assets – a concentration that could become a growing risk to local government finances, property and manufacturing…China’s $2.9 trillion trust industry also remains deeply distressed, potentially with their capital solvency at risk”. “Yet revitalizing a network that plays a vital role in supporting underdeveloped areas could have a powerful GDP multiplier effect, especially at a time when Xi’s party has struggled to channel more credit to small and medium-sized enterprises. In 2023, Chinese provinces injected $31 billion of fresh capital into shaky regional banks via special-purpose bonds, an effort that speaks to growing concern over the broader financial system”.

Chinese consumption – low or underestimated?

Han Feizi notes the Western narrative that “if only China could stop squeezing its long-suffering households, consumption could become an engine of if not growth then at least stability. But that would require empowering households. And we all know inefficient SOEs and venal local governments will fight tooth and nail against the interest of households whose consumption was a paltry 38% of GDP in 2021. While profligate Americans consuming 68% of GDP may not be a proper comparison, frugal Japanese and Korean households consumed 54% and 48% of GDP, respectively, substantially more than their put upon Chinese neighbors. Given the immense size of China’s economy, its imbalances have global implications, they say. Analysts have recently pointed out that while China’s economy is 18% of global GDP, it accounts for only 13% global consumption and a massive 32% of global investment. Through trade and capital flows, China is surely offshoring its extreme domestic imbalances to the world”.

Han Feizi argues the Western narrative is flawed. He points out China’s consumption may be grossly understated. For example, the estimate of China’s 13% contribution to global consumption is low and inconsistent with the fact that “in just about any consumer category…China will likely be consuming well over 20% of the global total”. China “accounts for over 30% of cars sold globally, over 20% of mobile phones, over 40% of televisions and 25% of furniture…China reported retail sales of RMB44 trillion, or US$6.9 trillion, in 2021, ahead of the US at $6.5 trillion. Household consumption in the US – which includes non-retail sales expenditures like rent, healthcare, tuition and insurance – was expectedly much higher at $15.9 trillion. Strangely, household consumption in China came in at $6.8 trillion, below retail sales”. This does not include housing, healthcare, tuition and insurance. Granted, China’s definition of retail sales includes some social purchases by government and corporate entities and is not an apples-to-apples comparison to US retail sales. But the ratio versus household consumption is revealing. Household consumption in the US is 245% of retail sales while a mere 98% in China”.

Han Feizi explains the discrepancy arises because China “never properly transitioned from its Soviet-era Material Product System (MPS) system of national accounts to the United Nations’ System of National Accounts (SNA) standard. MPS accounting is only concerned with material production. Services are considered costs of production and excluded by design. In China’s first attempt at converting MPS to SNA in 1985, it tacked on a ludicrously low 13% to the MPS number and called it China’s services GDP. Over the years, the World Bank has twisted the arm of China’s National Bureau of Statistics for modest increases to China’s services GDP with limited success. The NBS fought tooth and nail to minimize these adjustments in order to maintain developing economy status for as long as possible. What we conclude from all this is that on an apples-to-apples UN SNA basis, Chinese households are consuming much more than 38% of GDP. And investments are much less than 42% of GDP. Most controversially, perhaps, we also conclude that China’s GDP is under-reported by an amount largely equal to household consumption outside of retail sales. If we had to ballpark it, we would say China’s household consumption is 50-55% of GDP, investment is 30-34% of GDP and total GDP needs to be grossed up by 25-40%.

Han Feizi concludes “this has many implications. One is that China’s economy is not nearly as unbalanced as conventional wisdom believes – it is merely a peer of its Asian neighbors Japan and Korea. It explains why the government only seems to give lip service to increasing demand while all policies somehow favor supply. It explains how China has avoided the dire consequences of running such an unbalanced economy for so long – mostly because it hasn’t been. If the above is true, the medium-term policy implications suddenly become less clear. Stimulating household consumption shifts from a no-brainer to a judgment call. The imperative of reigning in investment suddenly becomes less absolute. China’s domestic imbalances may not be so severe and, as such, its effect on global imbalances more limited”. Hence, “policy prescriptions are far from obvious”. 

Weijian Shan adds “it is suggested that China’s household consumption is constrained by low household disposable income as a share of gross national income…according to data from The Economist, if you include social transfers in kind – meaning benefits like welfare, social security, and other forms of government and nonprofit assistance – China’s household disposable income as a share of gross national income is higher than in such countries as Sweden, South Korea and Demark, although still much lower than other places like the United States, the EU and Japan…The bad news is that private consumption, even including social transfers in kind, remains too low at about 45% of GDP, compared with 72% for the United States. But the good news, particularly for investors like us, is that there is much room for growth. It does require China to rebalance its economy more in favor of private consumption and away from fixed asset investments. But we believe this will inevitably happen as China’s savings rate, and therefore investment rate, declines over time along with the aging of the population”.

FDI and ODI trends

One area where the Chinese government remains defensive on is FDI. According to Global Times, the Ministry of Commerce (MOFCOM) asserts China’s inbound foreign investment was still at historic highs amid fluctuation. “From 2019 to 2021, China’s inbound foreign investment set new records for three consecutive years. During the first 11 months of 2022, China’s foreign direct investment (FDI) reached 1.16 trillion ($164.278 billion) yuan, the highest level for any comparable period in history…from January to November this year, the number of newly established foreign investment-backed enterprises in China reached 48,000, jumping by 36.2 percent year-on-year…China’s high technology sector attracted 386.65 billion yuan of foreign investment from January to November this year, accounting for 37.2 percent of total inbound foreign investment volume”.

Global Times notes in January 2024, “foreign direct investment in the Chinese mainland in actual use jumped by 20.4 percent from December 2023, that represented an 11.7 percent drop on a year-on-year basis, according to the Chinese Commerce Ministry. Meanwhile, 4,588 new foreign-invested firms were established across the country, up 74.4 percent year-on-year. Also encouraging is that FDI in the high-tech manufacturing sector soared 40.6 percent year on year” in January 2024. It adds “the Government Work Report…outlined efforts to attract foreign investments. For example, all market access restrictions on foreign investment in manufacturing will be abolished, and market access restrictions in services sectors, such as telecommunications and healthcare, will be reduced. Work will also be done to make China a favored destination for foreign investment”.

Chen Long provides a balanced perspective. “China’s balance of payment data for Q3 shows that the country faced a surge of net capital outflow. Foreign inflow dried up while outbound investment remained high. Data published by the State Administration of Foreign Exchange (SAFE) shows that China’s capital account had a deficit of US$101 billion in Q3, the second largest in seven years, only behind Q3 2022…preliminary data shows that the bulk of net outflow came from direct investment, which saw a net outflow of US$65.8 billion, the largest ever…The net outflow of direct investment is partly because China’s outward direct investment (ODI) rose to US$54 billion in Q3, the largest amount in seven years, as Chinese firms more actively looked for opportunities and resources in other countries. The more surprising development is that foreign direct investment (FDI) into China fell to -US$11.8 billion in Q3. FDI has indeed been shrinking since 2022, as foreign firms’ profits have fallen, and many have paused new investments in China. But this is the first time that a negative figure has been printed…most likely in the form of remitting retained earnings, and possibly also in the form of Chinese subsidiaries paying back loans to their parent companies…Multinational firms are also increasingly concerned about geopolitical risks. The so-called de-risking, friendshoring or reshoring in essence all mean one thing – reduce reliance on China and move the businesses to other places”.

Chen Long points out while “these concerns are real, but the reality is more nuanced. Even if China’s growth is just about 4%, the incremental amount of GDP every year would still be about US$700 billion, larger than the entire economy of Belgium, so it is still a huge market and only gets bigger. While the narrative of de-risking and reshoring is popular in the media, there is little evidence that firms have left or are leaving China en masse. In fact, firms such as McDonalds and Starbucks have recently decided to double down on the Chinese market”. The FDI decline is also “due to the simple fact that China’s interest rates are now much lower than those in most developed countries…For almost two decades, interest rates were higher in China than in most developed economies. Interest rates in developed economies were almost all near zero after the global financial crisis. At those times, multinational corporations took advantage of the zero interest rate at home and then lent to their China subsidiaries. They also preferred to leave all the retained earnings in China because of the higher return offered by Chinese banks. But things have changed since last year, when central banks in most developed economies, with the sole exception of Japan, started to hike interest rates aggressively to fight inflation. Meanwhile China has cut interest rates…it makes much more sense for multinational corporations to move their retained earnings back home, simply to get a higher return, even if they are not concerned about geopolitics at all…it is plausible that portfolio investment also saw net outflow. Foreign investors reduced exposure to Chinese stocks and bonds while Chinese investors increased investments in the offshore markets”.

Nicholas R. Lardy notes “foreign firms operating in China are not only declining to reinvest their earnings but – for the first time ever – they are large net sellers of their existing investments to Chinese companies and repatriating the funds…The investment selloffs are contributing to downward pressure on the value of the Chinese currency and, if sustained, will modestly reduce China’s potential growth. Several factors appear to be influencing the trend, including the spike in US-China tensions…Beijing’s closure of foreign consultancy and due diligence firms that are critical to foreign firms’ evaluation of potential new investments and its increasingly stringent regulatory environment, including a new national security law and restrictions on cross-border data flows, have led foreign firms to reduce their direct investment or even to disinvest from their existing direct investments”.  Inflows have fallen from a peak of $12.6 billion in 2021, “offshore listings of Chinese companies in US markets plummeted to $468 million in 2022…new listings in the United States languished at only $405 million in the first three quarters of 2023”. Similarly, the value of Chinese IPOs in Hong Kong fell significantly in 2020 while foreign capital raising for China-focused venture capital and private equity funds fell from “almost $50 billion in 2021…to $20 billion in 2022 and only about $5 billion in the first three quarters of 2023”.

Aya Adachi notes in 2023, “foreign direct investments (FDI) to China are negative for the first time in decades, with USD 11.8 billion in foreign capital flowing out. Meanwhile, investments to nearby markets have increased, hitting a record of USD 222.5 billion in Southeast Asia in 2022. These shifts underscore that diversification of foreign investment away from China is taking place” as part of corporate strategies. Aya Adachi explains large “original equipment makers (OEMs) like Apple have relocated production and encouraged diversification of components”. Suppliers like auto-parts manufacturers are “pursuing economic opportunities propelled by both a pull of rising demand in new markets and a push of overcapacity in China’s auto market”. “Balancers, epitomized by Panasonic, navigate the dual imperatives of localization, including branding adjustments in reaction to customer preference, and simultaneous diversification in response to rising risks”. Some exit China because those operations are no longer commercially viable. Geopolitical sensitivities are causing some firms, particularly those in semiconductor and related industries, to recalibrate their dependencies on Chinese components. Chinese companies are also pursuing diversification along similar lines. “Domestic political crackdowns, as in the case of Tencent, are prompting companies to explore alternative locations abroad. To circumvent scrutiny there, businesses are strategically using third markets to navigate US restrictions…In addition, Chinese suppliers are relocating and aligning their strategies with those of their international customers…linkages persist between foreign multinational corporations and Chinese companies in third markets. This interplay underscores a dynamic shift in the global business landscape, with diversification becoming a shared imperative for both Chinese companies and their international counterparts”.

Xu Qiyuan[5] notes that “even without the geopolitical tensions…the inevitable relocation of Chinese industries would still occur”. The “continuous appreciation of the Chinese yuan’s exchange rate, the ongoing increase in labour costs and growing domestic environmental pressures” is leading to large-scale offshoring of Chinese manufacturing and it is natural for China’s economy to shift towards services. “We’ve reached a stage that resembles an inverted U-shaped curve, approaching the peak or descending from the peak…This means the proportion of manufacturing in the economy has already peaked and is beginning to decline…Like Tesla, many American and European companies depend on China for a large portion of their sales. In 2006, foreign businesses in China exported roughly seven times the amount they sold domestically, according to Xu. Around 2012, the ratio was nearly equal, fluctuating in the range of around US$900 billion to US$1 trillion. By 2021, foreign companies’ domestic sales were more than double their exports. If you consider foreign businesses as whole, then two-thirds of their business is in China for China – producing in China and selling in China”. Wang Huiyao[6] notes multinationals know “China has huge potential…In a developed country like the US, (a population of 1,000) may have 800 cars…but in China probably it’s only 200 (cars). So there’s a huge (growth) wave for China”. US businesses in China, however, have a less optimistic outlook, according to the American Chamber of Commerce[7]. Its survey of member companies found that 31 per cent were increasing their investment in China last year from the year before, 22 per cent were decreasing their investment, and 40 per cent were redirecting or planning to redirect investment originally planned for China, mainly towards South-East Asia.

Max J. Zenglein thinks it is misleading to conclude the shift in investment flows is evidence of diversification out of China. “There will be limits to replacing the economies of scale China’s manufacturing base can provide any time soon. A large domestic market and a large labor force provide foundations that are difficult to find elsewhere. Despite a shrinking labor force, employment in manufacturing is still 2.7 times the size of ASEAN. The combined labor force in China’s five provinces with the largest number of industrial workers already amounts to 94 million, well above ASEAN’s 78 million (and) India’s current 60 million workers…irrespective of non-labor-related factors such as infrastructure and technological capabilities. Even in the best conditions, building alternative production bases will face significant constraints and, more importantly, take time and massive investments”.

Frederic Neumann[8] notes China only started “to venture out into the international investment landscape in the mid-2000s, China was, in a sense, late to the game. However, after rapid increases in the first half of the 2010s, China’s stock of ODI now surpasses that of Japan, Germany and the UK. And there’s still room for exponential growth. As of the end of 2023…the overall stock of Chinese outward investment was just one-third that of the US, and still small relative to the size of China’s economy. At 15.7% of gross domestic product (GDP)…it’s well below that of the major developed economies and the global average of 34%. The reason…is that Chinese firms have strong incentives to go out to explore global markets, including the so-called Global South developing markets. As China develops, its funding of ODI will be an increasingly vital channel to gain access to resources, markets and trade routes. The dynamic marks an about-face from earlier policies de-emphasizing ODI in 2016 and 2017 and during the pandemic period. Yet an increasing amount of investment now would align with broader Chinese economic and political development priorities…We think that Chinese ODI flows are set to accelerate…In our baseline scenario, which envisages ODI rising in line with its recent trend, annual flows could rise by over 50%, with at least $1.4 trillion to be invested abroad between now and 2028. There’s an ever more dramatic upside scenario…China’s ODI rising in sync with per capita gross domestic product. That would mean a near-tripling of the recent pace of ODI to well over $400 billion per year”.

William Pesek notes “China’s outgoing cash contrasts sharply with the 12% drop in overall FDI into emerging Asia in 2023. Roughly half of the investment China is making in the region is going to Southeast Asia, up 27% year on year. Especially Indonesia. Southeast Asia’s biggest economy, which grew more than 5% in 2023, took in about US$7.3 billion of Chinese ODI last year”. “Significantly, the sectors in which China is focusing are shifting. For example, mining and real estate ODI have declined. More recently, manufacturing, transport, storage and postal services have been among the top sectors. Now, it’s technology, renewable and green energy, electric vehicles and digitalization”. “China’s geographic priorities are pivoting, too. The US and Europe are less in favor, while Southeast Asia, Latin America and the Middle East are seeing more ODI from Asia’s biggest economy. He highlights the surge in Chinese outward direct investment “speaks to how Chinese companies seeking growth abroad are altering financial dynamics from Asia to the West to Latin America. And how China Inc’s investment ambitions are only just beginning to remake the global pecking order, despite Washington’s attempts to curb its influence”.

According to Yi Wu[9], in recent years, Xi’s Belt and Road Initiative (BRI) “presented tremendous opportunities for China’s ODI investors, leading to a significant uptick in the number and value of investments within these nations.” Yet such BRI projects covered just over 70 countries. By the end of 2022, Chinese domestic investors had established…a “robust global presence” with 47,000 offshore enterprises spanning 190 countries worldwide. More than 60% of these enterprises were in Asia, 13% in North America, and 10.2% in Europe. That left roughly 16,000 overseas enterprises, around 34% in BRI countries”. William Pesek notes China’s ODI is aligned with its geopolitical ambitions. China’s standing in Global South and Asian multilateral platforms provides a favourable policy coordination environment for the internationalization of Chinese enterprises. Countries at odds with Beijing such as Philippines, Mongolia and Papua New Guinea “saw a roughly 100% drop in engagement with China Inc investments between 2022 and 2023…China Inc isn’t making outbound investments in a vacuum”.

Stockmarket uninvestability and interventions, geopolitics and de-dollarisation

Wang Juanjuan, Yue Yue, Quan Yue and Denise Jia notes “Chinese investors began 2023 full of optimism that an economic rebound fuelled by resilient export growth, relaxed real estate policies and other regulatory prescriptions would lead to a turnaround for the nation’s bear market in stocks. Instead, China ended the year with the world’s worst-performing equity market and its blue-chip CSI 300 Index down for the third straight year, losing 35% over 36 months. The bear market for equities – triggered by the pandemic – now reminds investors of the 2015 stock market crash when A-shares lost a third of their value in one month and a series of government interventions did little to quell investor fears”.

The contrast between China’s languishing stockmarkets and Western record-breaking stockmarkets is jarring. Wolf Richter notes China’s Shanghai Stock Exchange fell 3.7% to close at 2,974  in 2023 (back where it was 17 years ago and -51% from its October 2007 all-time high). Hong Kong’s Hang Seng Index fell -13.8% to close at 17,047 (back where it was 24 years ago and -48.6% from its January 2018 all-time high). In contrast, US and European stockmarkets are hovering around all-time highs. Even Japan’s Nikkei 225 staged a strong 28% performance to close 2023 at 33,464 or 14% below its December 1989 all-time high.

Wang Juanjuan, Yue Yue, Quan Yue and Denise Jia point out the fallout from China’s stockmarket crash has been extensive. “Chinese retail investors who loaded up on derivative products known as snowballs[10] have been hit particularly hard…The protracted A-shares rout has led to many snowball products, especially those tracking the CSI Smallcap 500 Index and the CSI 1000 Index, breaching the knock-in level, triggering forced sales of the futures contracts”. The value of snowball products tracking the CSI 500 Index and the CSI 1000 Index is estimated between 200-327 billion RMB. “Multiple brokerages estimate that the decline in stocks has pushed 100 billion RMB of snowball products near their knock-in level. But some analysts say the snowball-triggered selloff is not enough to move the whole market”. “The fundamentals of A-shares since last year are not very good and a large number of listed companies have posted worse-than-expected financial results…During last year’s third quarter, 5,279 Chinese listed companies reported total revenue of 53.27 trillion RMB, an increase of only 2.22% from the 2022 third period. Among them, 1,041 companies reported net losses for the first three quarters, and almost half of them posted profit declines ranging between 13.3% and 37.5%”.

Government interventions has been loud and overt but has consistently stopped short meeting investor demands for large-scale stimulus. Wang Juanjuan, Yue Yue, Quan Yue and Denise Jia note since August 2023 “the authorities have launched a series of support measures, such as lowering the stamp duty on stock trades, tightening regulations on initial public offerings (IPOs) to limit the number of IPOs and reducing the minimum margin ratio for stock purchases through margin financing. Since October, China’s US$1.24 trillion sovereign wealth fund, Central Huijin Investment Ltd., has repeatedly bought exchange-traded funds (ETFs) and shares of state-owned banks. In December, the country’s securities watchdog released new rules for listed companies’ share buybacks and cash dividends, aiming to boost market confidence”. Other measures include restrictions on stock lending and short-selling complemented by initiatives to shore up the property market and inject liquidity into the banking system. China’s leaders have also launched a charm offensive at global forums. They point out “the measures failed to reignite investor optimism. The CSI 300 benchmark continued its decline in the first three weeks of January before recovering some lost ground end of January. The index was still down 10% for the new year”. In late February 2024, the market staged a recovery and recouped its earlier losses. But there is still an ongoing struggle between bulls and bears.

William Pesek notes China’s regulators also “tightened curbs on China’s rapidly growing quant trading industry. Both the Shanghai and Shenzhen exchanges are increasing monitoring of such dealing, particularly in the leveraged products space, after freezing the account of a major fund for three days. Such regulatory uncertainty has been a constant worry for global investors since Xi’s tech crackdowns beginning in 2020. Those moves, and myriad others since then, tarnished Xi’s 2013 pledge to let market forces play a decisive role in Beijing decision-making. For all Xi’s promises, China today is fending off worries it’s a buyer-beware market. In March, Xi entrusted the reform process to Premier Li, who has since promised to accelerate moves to diversify growth engines…Too many foreign investors still fear that Chinese markets are underpinned by a developing economy with limited liquidity and hedging tools, a giant and opaque state sector, and an immature credit-rating system that obscures risk and enables the chronic misallocation of capital”.

Given my experience as an analyst and securities regulator, I would like to share my perspectives. The starting point is to understand the historical relationship between China and the global investment community. In the mid-1990s, global hedge funds flooded the Asian tiger economies (South Korea, Thailand, Malaysia and Indonesia) with speculative capital; causing their markets and economies to overheat. In 1997/8, these funds suddenly withdrew capital and coordinated a short-selling and publicity attack to trigger a run on the currency and balance of payments. This culminated in a financial crisis in several Asian countries. South Korea, Thailand and Indonesia capitulated to IMF conditionalities but China, Hong Kong and Malaysia co-ordinated a decisive intervention that ended the attack. The 1997 Asian crisis caused emerging market governments to have a jaundiced view of global funds but at the same time motivated them to implement reforms and strengthened up their forex reserves. It remains a reason why Asian regulators move slowly on market liberalisation and removing capital controls.

Despite such experiences, most countries are generally acquiescent to the demands of global investors because they want to attract foreign inflows. The major exception was China. Global investors found they can hardly bully nor ignore the world’s second largest economy. Despite restrictions and lack of legal clarity, foreign investors poured capital into onshore and offshore China-related stocks. In recent years, investors found themselves on the receiving end and suffered significant losses from the property collapse and bond defaults, decoupling and derisking policies, and from interventions such as China’s socialism big bang[11] and crackdowns relating to national security, education, online gaming and anti-corruption. China’s government goes its own way, tweaks policies on the fly and considers itself not beholden to global and local investors. Now that the tables have turned, it is unsurprising the global investment community seem to take delight in putting the squeeze on China. China’s critics have seized on the failure of the government to revive its stockmarkets as proof that foreign and local investors have lost confidence in China’s government and its policies and that its economy is on the verge of collapse.

My opinion is that China’s current stockmarket slump is not comparable with previous downturns. This is because the slump coincides with structural changes in China’s economy and the geopolitical climate. Structurally, China’s macroeconomic growth has peaked and is downshifting onto a slower secular path. China simultaneously faces headwinds from several directions – a property and local government debt crisis, industry consolidation, investment outflows and geopolitical conflict. Most economists believe China has sufficient resilience to overcome these economic challenges and that it should be able to sustain growth at a faster pace than post-1990s Japan. If this assumption holds, the doom-and-gloom scenario is likely to be proven false and the Chinese stockmarket should be able to recover.

But in the background, geopolitical forces are working to steepen the decline. In tandem with rising US interest rates and a strong dollar, the US has extended the scope of containment to finance and investment. The US has leveraged on its global finance dominance to turn China into an investment pariah. It is using moral suasion to persuade Western investors to sell down their China holdings, to ostracise investing in China and to redirect capital flows to allies like Japan and India.

Bloomberg reports “what started out as a performance-driven exodus now risks becoming a structural shift due to a toxic combination of doubts over Beijing’s long-term economic agenda, a prolonged property crisis and strategic competition with the US…Foreign investors no longer fear leaving China out of their investment universe, said Gary Dugan…at Dalma Capital Management Ltd. We sense that international investors are just giving up trying to read China and will revert to a world-ex-China opportunity set, hence resetting the benchmarks to MSCI World ex-China.” “An analysis of filings by 14 US pension funds with investments in Chinese stocks shows most of them have reduced their holdings since 2020…Some[12] are exiting entirely…China’s share in the MSCI Emerging Markets Index dropped to 23.77 per cent as of end-December, the lowest since mainland stocks were added to the gauge in 2018.  In the Asia Pacific Index, China now accounts for about 15 per cent, down from 24 per cent in 2020…The number of new EM equity-focused funds with no China exposure reached 19 in 2023, up from 15 in 2022 and just one in 2020, data compiled by Bloomberg show…The MSCI China Index has never been this cheap versus the S&P 500 when looking at forward earnings estimates, trading at a 56 per cent discount. The estimated price-to-earnings ratio is below its five-year average”.

Nigel Green adds Morgan Stanley Capital International (MSCI) excluded 66 Chinese stocks from its global benchmarks. “The move by MSCI to trim Chinese stocks is the highest tally of exclusions in at least two years, signifying a significant shift in investor sentiment”. “Simultaneously, MSCI has elevated India’s weightage in its Global Standard (Emerging Markets) index to a historic high of 18.2%…In its February review, MSCI added five Indian stocks to its Global Standard index without any deletions. This move reflects confidence in India’s market resilience and its potential as an attractive investment destination. Notably, the country’s weightage in the index has nearly doubled since November 2020, positioning it as the second-largest constituent after China”. William Pesek notes “MSCI’s recent decision to delete dozens of Chinese companies from multiple indexes is an added blow, complicating Beijing’s efforts to restore foreign investor confidence…MSCI’s changes posed further downside risks in China’s stock markets, including for investors that may be forced to liquidate”.

Wolf Richter notes “the Nikkei 225 closed at 39,099, the first all-time high in 34 years, finally surpassing its December 1989 high of 38,916. And the happy moment occurred only after: (1) 11 years of massive QE by the Bank of Japan under the doctrine of Abenomics, which included large-scale purchases of equity ETFs; Record share-buybacks by Japanese companies in 2022 and 2023; Warren Buffett’s[13] hype about Japanese stocks in 2020; and massive foreign buying, following Buffett’s signal”. However, he points out that ironically, an investor in Japanese stocks would have lost 5% in three years because the yen crashed from ¥106 to ¥150.6.

Some global investors have gone so far as to categorise China as uninvestable. The use of labels to ostracise investments in specific asset classes or countries is not a new practice. The initial investability filters were ethical investing and corporate governance. Later this was followed by ESG. The latest fashion is geopolitical de-risking. Funds find their loyalties are coming under public and political scrutiny. This is being reinforced by peer pressure with funds vulnerable to capital withdrawals and fund managers vulnerable to losing their jobs – partly for investing in adversaries and partly for underperforming because they did not follow the herd.

The contrasting performances of Western markets (including Japan) relative to China market can be attributed to a geopolitically-charged global monetary landscape that features liquidity congestion[14] and the emergence of a breakaway yuan currency area. Liquidity congestion follows the end of large-scale PBOC sterilisation of USD debt and the beginning of de-dollarisation. Since China is no longer willing to accumulate USD debt, this would trigger USD-yuan deleveraging and withdrawal of USD liquidity. The repatriation of USD-liquidity from China is then re-leveraged within the USD currency area and is supportive of the bubbly Western markets and fuels inflationary pressures in the Western economies.

The withdrawal of Western liquidity leads to a deleveraging of China’s markets. The point to note is that USD leverage is high and yuan leverage is low. This is because Western financial markets are deep and broad and their intermediaries (particularly hedge funds) are skilled in optimising leverage and laying off risks to (usually unsuspecting) clients. Strategic players are backstopped by access to Fed liquidity.

In contrast, yuan leverage is low due to capital controls, language and legal issues, and the lack of domestic intermediary sophistication. In the absence of international liquidity, China’s stockmarket becomes a Warren Buffet market with wide bid-offer spreads, reflecting the bargain prices that long-term investors with deep pockets insist on and the reluctance of sellers to part with their shares for such a large discount. Internationally, China is left dependent on support from Global South allies but they have considerably weaker credit standing than Western intermediaries and clients. In the short-term, China’s policy-makers can do little to counter the effects of Western liquidity withdrawals. Longer-term, fundamentals will assert  themselves but returning inflows will be considerably smaller for geopolitical reasons.

How should China’s policy-makers respond in the current situation? William Pesek points out that “unfortunately, Beijing seems to be spending more time dusting off playbooks from stock crashes of the past, particularly in 2015. In the summer of 2015, Chinese shares fell more than 30% in a matter of weeks. At the time, Team Xi loosened rules on leverage, reduced reserve requirements, delayed all initial public offerings, suspended trading in thousands of listed companies and allowed mainlanders to use apartments as collateral to buy shares. Xi’s government rolled out advertising campaigns to buy stocks out of patriotism…Jeremy Stevens…similar interventions in 2015 did not achieve their goalsin August 2015, Chinese stocks suffered their most drastic four-day downturn since 1996 amid fears that the government might have to retract its market support strategies”.

Generally, China’s interventions to shore up its markets have floundered. Investors generally don’t like the clumsy and heavy-handed interventions that leaves them feeling that the market is rigged. My view is that there seems to have been a generational change among investors and attitudes on interventions have changed. Older generation investors prefer a sharp crash to a drawn-out correction because they believe that once shares have shifted from weak to strong hands, a genuine recovery can begin. In contrast, modern investors like the central bank “put” or liquidity support and bazooka stimulus because it assures supply of “no-questions asked” liquidity that feeds into continuously rising asset prices. They wrap themselves in the “forward guidance” become the script[15] for Western market narratives. Modern investors are squeamish about old-fashion market discipline and feel let down when there is no government cavalry to rescue falling markets. Thus investors clamour for “confidence-boosting” monetary and fiscal policy stimulus in China to juice asset prices; for “market-friendly” measures (usually lower taxes and regulatory burden) to improve business confidence; or alternatively the fire-sale of distressed assets to create buying opportunities at large discounts. These are set as a pre-condition for a resumption of global fund inflows. The commonality is that investors’ advice is self-interested and tailored to fatten their wallets. The pitfall is that these policies have damaging long-term economic consequences. If it comes to a point when governments are forced to tighten their fiscal purse strings and central banks to turn off the liquidity tap, returns are no longer “assured”, and authorities will find themselves at odds with markets once again.

China would do well to avoid large-scale interventions as they create a dependency trap from which it is difficult to exit (e.g. US, Japan and EU) as well as compound problems on the currency and credibility front. I believe central bank interventions by buying financial products like ETFs or non-government debt are ill-advised. In the 1998 Asian crisis, the Hong Kong Monetary Authority bought shares and later had to package these shares into an ETF to unwind their positions. Japan’s BOJ has also bought Japanese equity and ETFs but also US stocks. Equity and corporate bond interventions should be left to pension or sovereign wealth funds to manage in line with their long-term objectives.

As the saying goes, “never let a good crisis go to waste”. There are still gaping holes in China’s regulatory regime. China’s main weakness is its opacity, poor governance and risk cultures, enforcement and ambiguous debt resolution processes. The Evergrande liquidation is a major test of how China intends to treat the rights of offshore debt and variable interest entity (VIE)[16] investors. In particular, VIEs were used to circumvent Chinese regulations restricting foreign ownership of assets and industries and, in turn, the investor protection rights are weak. It is partly the fault of foreign investors (and investment banks) to invest in such vehicles but, to be fair, the Chinese government also share the blame for turning a blind eye which implied they unofficially greenlighted these arrangements. If foreign investors feel mistreated, then this could trigger a further foreign sell-down of Chinese debt and equity holdings.

It is timely for China to offer greater clarity and certainty on government policies and investor rights; to tighten up on enforcement and to undertake surgical culling of “dubious” companies, flawed products and mismanaged intermediaries to instil market discipline. On this note, Jeff Pao notes “the China Securities Regulatory Commission (CSRC) will strive to improve the quality of listed companies by improving quality evaluation standards further, by placing greater emphasis on investment return requirements and by vigorously encouraging listed companies to bring improved returns for investors through buybacks and increased dividends”. Global Times reported “the State-owned Assets Supervision and Administration Commission (SASAC) vowed to fully carry out a new appraisal system for the listed units of state-owned enterprises (SOEs) to better reward investors and boost their confidence…the SASAC vowed to fully implement an appraisal system based on the market capitalization of listed arms of SOEs in an effort to build an investor-centric environment. The move is aimed at guiding enterprises to pay more attention to the intrinsic value and market performance of listed companies, convey confidence, stabilize expectations and better reward investors, according to the SASAC. The measures will assess the performance of the listed firms controlled by central SOEs in a quantitative way and objectively appraise each company’s market capitalization management, and intensify penalties for violations that step on the red line or cross the bottom line”.

In relation to this, Japan was unable to entrench its global position due to the inability of Japanese intermediaries to challenge US and European domination of global finance during the 1990s. At the moment, Chinese markets can now match Western markets for fund raising and price discovery. But the global asset management, middle and back office, capital market and information intermediation functions are still mostly dominated by Western firms. Therefore, China’s needs to strengthen its domestic asset management industry, the broader capital market information ecosystem and China’s role in global intermediation; particularly if it is to convince the Global South to have confidence in the yuan currency area.

Will China’s markets recover? At some point, mean reversion will kick in when foreign selling dries up and fund allocations are rotated to narrow the discount between China and Western markets. In general, this is a good time to ignore Mr Market[17] and to “buy low and sell high”. Asian investors are comfortable with China risks while others will find it difficult to ignore the second largest and probably most competitive economy in the world and its large roster of world-class companies. However, the recovery is unlikely to be as strong as in the past due to the ostracization of China by a large group of Western investors. The irony is that China’s central bank may not have to worry so much about speculative inflows into its financial system in the future.

Prospects for China’s market must be analysed from the context of geopolitical conflict and de-dollarisation. Geopolitical considerations are an unspoken aspect of US monetary policy. Western central banks tightened monetary policy and raised interest rates over the past 20 months. The net effect is to deleverage USD-denominated intermediation which is creating USD liquidity shortages (outflows) in non-Western countries and weakening their currencies and markets. This hampers China and the Global South from making progress in de-dollarisation.

Mandy Zuo and Ralph Jennings highlight Chinese officials are suspicious of the geopolitical motivations. They note comments by Chen Wenling, formerly with the State Council that “the nation must steel itself in the midst of a finance war”. “China should remain on guard, as it remains at a disadvantage in terms of financial competition with the US…[We are] always in a state of being contained, suppressed and harvested…The status of the US dollar is still there, and the strength of the US is still there. Any increase or decrease in interest rates by the Federal Reserve will have an impact on us. Describing foreign investors’ retreat from China in the past year as evidence of a finance war, while their bearish sentiment toward China is the result of a public opinion war”. Chen Wenling also said “Hong Kong must strengthen its status as a global financial centre. Ensuring the safety of US-listed Chinese company assets should be another priority for Beijing in the two sides’ financial wrangling…Washington has been pushing Chinese firms to delist from the New York Stock Exchange, and she pointed to the delisting of five state-owned Chinese companies, including energy and chemical giants PetroChina and Sinopec in 2022. And after the US presidential election later this year, more companies could be forced to delist”. She expects foreign investors to likely flock back to China due to interest rate trends and voiced concerns that “anticipated interest rate cuts by the US Federal Reserve could lure a large amount of money back to China and potentially trigger fresh turbulence in the domestic financial market. We must prevent large-scale malicious speculation to harvest China’s high-quality assets or [the injection of US capital] causing trouble in the Chinese stock market”. However, US-based researchers like Yan Liang think finance war is an overstatement. Yan Liang notes “there are many scholars in China warning against liberalising the [nation’s] capital account, which may allow US dollar holders to grab our assets”. However, financial decoupling is “a lingering threat facing the two economic superpowers”.

To some extent, China is following its Asian crisis playbook to defend the yuan as the last line of defence (rather than the equity market). Hence, the government has focused on tightening controls to squeeze out short positions (short-selling and round-tripping), increasing physical delivery requirements and curbing outflows (repatriation, transfers, overseas investments). But there are notable differences. China has not raised interest rates nor sold FX reserves[18] aggressively. This restraint may reflect China’s long-term de-dollarisation strategy to gradually replace the loss of Western liquidity by expanding yuan liquidity. In this regard, China’s monetary policy (and capital controls) is constrained by the need to find a balance between expanding yuan liquidity to support the loss of USD liquidity and yet somehow preventing the yuan liquidity from being used to attack yuan exchange rate stability. I think China is likely to continue on its task of actively re-directing their flows from Western capital markets to circulate within the Global South and to collaborate to promote non-USD-denominated products, asset managers, financial institutions and information intermediaries (index firms and rating agencies) and to establish prudent and efficient financing, payments and legal arrangements for cross-border Global South financial flows.

William Pesek thinks Beijing is prioritizing bonds rather than stocks. “The hyper-targeted nature of policy rescue efforts by the People’s Bank of China (PBOC) and other arms of the state explain why yuan-denominated corporate bonds were among the globe’s best-performing asset classes last year…Chinese government bonds performed better than US Treasuries in terms of total returns. Adding in the outperformance by corporate bonds, 2023 was a milestone year for China’s emergence as a debt-market superpower…At the moment, foreign investors hold about 30% of the $26 trillion of US public debt outstanding. In China, it’s 10% at most”. “The dollar bonds of local government financing vehicles (LGFV) were also big winners in 2023. Unlikely, too, given all the hand-wringing about the US$9 trillion LGFV debt mountain…credit rating companies worried that municipal debt will be China’s next crisis, one that could dwarf today’s huge property troubles. The reason bonds are winning: Xi’s team understands that a vibrant sovereign bond market is needed to defuse the property crisis and head off a local government debt meltdown. The same goes for achieving Xi’s bigger goal of replacing the dollar as the linchpin of trade and finance”.

Aileen Chuang and Peggy Sito notes PBOC and HKMA announced “expanding the list of eligible collateral in the RMB Liquidity Facility in Hong Kong to include yuan-denominated bonds sold by the Chinese government and the nation’s policy banks” and to widen “access to the onshore repurchase agreement or repo market, pending legal and regulatory fine-tuning”. These initiatives “marks the first time these yuan-denominated securities have been formally recognised as eligible collateral in the offshore market” and “facilitate the diverse use of Chinese bonds held by Bond Connect investors, such as bridging intraday funding gaps”.  “The gradual opening up of the onshore repo market will address offshore market players’ growing need for funding and liquidity management as they increase their allocation to the onshore bond market. “This initiative will, for the first time, enable more foreign investors (including Bond Connect investors) to conduct onshore repo transactions to obtain liquidity at a lower cost”. According to Ju Wang[19], “opening up onshore repo will be viewed as the last mile in a country’s capital account liberalisation…Essentially, you are opening up your money market, and currency’s funding to foreigners. That usually requires a lot less control of the currency and a much more liberal exchange-rate regime. If they [the regulators] are thinking in that direction, that tells you that eventually, they want a much more flexible, floating [currency] and more internationalised yuan. The repo-market decision is significant as it makes the Chinese yuan a true competitor to major world currencies, serving not only as a currency for trade but also for financing”. Tao of Deutsche Bank[20] thinks “opening up to the wholesale funding market, after years of hesitation, indicates China is now more prepared and confident about developing the market further…The PBOC started allowing the yuan-participating banks into the repo market because banks have liquidity management needs…Now, it will roll out to all investors: asset managers, life insurers, pension funds, sovereign firms and hedge funds.” Andrew Fei[21] notes legal details and infrastructure changes needs to be worked out. “One key issue is whether offshore investors can use internationally recognised master agreements to document their repo transactions in the onshore market…Some foreign investors may not be familiar with existing Chinese-language onshore master repo agreements, while many are seeking advice on the enforceability of close-out netting for repos in the onshore market. The PBOC and HKMA will also need to clarify how Bond Connect investors can access the onshore bond repo market. These investors currently access the onshore bond market via offshore accounts established in Hong KongThey do not have onshore bond or cash accounts, so they may need to rely on some market infrastructure linkages to access the onshore bond repo market”.

Lastly, there is the question of navigating the forthcoming policy transition in the West. The US and European markets appear in the midst of a transition from QT-high interest rates-strong currency to QE-low interest rates-weak currency. If the policy reversal takes eventually place, this would immediately relieve the pressure on the yuan, reduce capital outflows and aid a stockmarket recovery and facilitate an acceleration in the de-dollarisation process. This could be a reason why Western central banks continue to reduce their balance sheets and are yet to begin easing policy interest rates. US policy-makers are mindful of the need to carefully manage the policy transition to avoid the risks that a policy retreat could turn into a disorderly rout if the USD and Western markets crashed.

National income accounting framework

Michael Pettis is the main proponent using the national income accounting framework to explain the policy constraints and trade-offs on China’s economic growth. Michael Pettis explains “GDP growth in most large economies is driven primarily by consumption and investment (with net exports usually too small to matter)…China currently invests around 42-44 percent of its GDP…This is extraordinary…investment comprises around 25 percent of global GDP…For more mature, capital-intensive economies, investment can comprise roughly 15-20 percent of GDP…for developing economies in the midst of their high-growth stages, such as Mongolia, investment levels tend to be much higher, typically around 30-35 percent of GDP. Unbalanced economies that have traditionally relied on high investment to drive growth, such as South Korea and Taiwan, are also in this range. China is different. Investment rose from 24 percent of GDP in 1990 to 40 percent by 2002 and to 47 percent by 2010. It then declined to 43 percent by 2019 and has been between 43 and 44 percent during the COVID-19 period”.

Michael Pettis points out China’s high investment explains why it has “among the fastest growing debt burdens in history. With growing amounts of investment directed into projects whose economic benefits are less than their economic costs, the surge in China’s debt burden is a direct consequence of this very high investment share”. “In theory, Beijing could solve the debt problem associated with high levels of investment by implementing policies that result in a sharp increase in the productivity of investment. It has been proposing this for years, for example by refocusing investment on the technology sector, but it has been unsuccessful so far and…it is unlikely ever to be successful. Because China’s imbalances are so deep, the limited number of ways in which they can be resolved all require a significant reduction in China’s reliance on investment to spur growth”.

Michael Pettis notes “Beijing’s economic policymakers largely accept that China must rebalance its economy so that growth is driven more by domestic consumption and less by investment. But once China begins to take seriously the need to rebalance its economy, China’s annual GDP growth is unlikely to exceed 2–3 percent for many years, unless there is a substantial increase in the growth rate of consumption”. “Given the disproportionately large investment share of economic activity, however, any reduction in its share of GDP must put significant downward pressure on growth in overall economic activity”. “But while nearly everyone agrees on the need for a greater role for consumption, there are significant political constraints to rebalancing that have always made it very difficult for countries that have followed an investment-driven development model similar to that of China’s. That’s because after decades during which investment grew faster than GDP, and GDP grew faster than consumption, the relationship between the three must be reversed. For at least the next decade or two, consumption must grow faster than GDP and GDP must grow faster than investment…By definition, increasing the household income share of GDP involves reducing the corporate and government income shares. This means that after decades of doing the opposite, rebalancing policies must effectively transfer income, either explicitly or implicitly, from governments and businesses to households. As of yet, however, there have been few concrete proposals about who will pay for these transfers and how they are to be effected”.

For simulation purposes, Michael Pettis assumed “investment declines to 30 percent of GDP in ten years…We can model…the Chinese economy by setting investment at 42 percent of GDP; net exports at 4 percent of GDP; and consumption at 54 percent of GDP. In this case, growth in China’s GDP over the ten-year period is just the weighted average growth of investment and consumption (assuming net exports are flat) and so will depend primarily on the assumptions we make for investment growth and consumption growth”. He outlines 5 scenarios.

  1. Rebalance with a surge in consumption. If consumption grows annually by 6-7 percent and investment grow by 0-1 percent, China will rebalance its economy within ten years. During that time, China’s average annual GDP growth rate would be 4 percent. The problem is that this requires large income transfers from local governments to ordinary households. This is politically difficult to manage without major institutional changes.
  2. Rebalance while maintaining current consumption growth rate. A more realistic rebalancing scenario requires a much sharper slowdown in GDP growth. In a moderately optimistic case, Beijing would implement policies that maintain household income growth and consumption growth at close to 3-4 percent annually even as GDP growth drops. If consumption grows annually by 3-4 percent a year and investment contracts annually by 1-2 percent a year, China would have rebalanced its economy within ten years. However, China’s average annual GDP growth rate would have dropped to roughly 1.5 percent.
  3. Rebalance with a sharp decline in consumption growth. History suggests that during a very difficult adjustment, the growth rate in household income, and thus consumption, often declines substantially. In a scenario where consumption growth decline to 1-2 percent, rebalancing would require an annual decline in investment of nearly 3 percent and GDP growth would be flat. Under these conditions, however, China’s net exports would likely surge, the effect of which would be slightly improved overall growth.
  4. Rebalance with a sharp contraction in GDP. The US 1930 and the Brazilian 1980 rebalancing experience involved a sharp, short-term contraction in GDP in which investment would contract far more sharply than household income and consumption. However, this scenario is unlikely as the Chinese government is likely to avoid the chaotic and politically disruptive process.
  5. Rebalance over a much longer time period. China could slow the pace of rebalancing to be politically acceptable but this involves two costs. The first is that it lengthens the period in which debt rises faster than the country’s debt-servicing capacity. This increases the risk of a disruptive financial adjustment. The second is that, like with Japan, slower growth stretches out over a much longer time period. It is worth noting in the early 1990s, Japan’s share of global GDP was close to 18 percent. Within twenty years, it was less than 8 percent. Based on simulations over fifteen and twenty years, assuming consumption grows by 3-4 percent and that soaring debt creates no other costs, China’s GDP growth drops to 2 and 2.5 percent respectively.

The national income accounting framework yields important insights but it should be borne in mind that the national income accounting framework provides tautological answers. Their strength is that they can be used to challenge policy choices as the framework imposes the discipline of requiring numbers to add up. In this regard, if China’s policy-makers chose to reverse the subsidies that previously generated rapid growth in production, “this would undermine the competitiveness of industries reliant on these subsidies. The irony is that the more growth depends on these subsidies, the more important these subsidized industries are to the economy and so the more painful it is to reverse them. Japan has been trying unsuccessfully to do this since 1986 and China since 2007”. Similarly, boosting “domestic investment in property, infrastructure, and/or manufacturing capacity…allows the economy to continue to absorb high savings and is what the Soviet Union and Brazil did in the late 1960s and 1970s, what Japan did in the 1980s, and what China has been doing in the past ten to fifteen years. The problem is that because this activity is nonproductive, it creates rising amounts of nonrecognized losses and a surging debt burden – and is ultimately unsustainable”. Economies could also reduce savings by “cutting back on excess production and firing workers…This can be an extremely painful form of adjustment and is how the United States adjusted in the early 1930s and Brazil in the mid-1980s. It involves adjusting in the form of negative growth and higher unemployment”.

Framing policy choices in this manner results in the tyranny of national income accounting where policy choices are locked into the objective of re-balancing; e.g. aligning savings with consumption. In this regard, accounting frameworks don’t explain changes very well because growth dynamics are usually unpredictable. Thus, it is possible for China to achieve outcomes surpassing those implicit in the national income accounting framework.

Western advice and deaf Chinese ears

Western economists and global institutions like IMF and World Bank constantly prescribe conventional macroeconomic remedies that focus on (1) top-down fiscal and monetary measures; (2) rebalancing from over-investment and excess savings towards consumption; and (3) structural reforms such as financial liberalisation, private sector-biased market reforms, expanding social safety nets and fashionable themes such as governance, labour market, climate change and diversity. However, the advice is viewed in some quarters as being geopolitically-loaded and serving Western interests. In this regard, IMF conditionalities have been criticised as harmful rather than helpful to developing countries experiencing debt distress. The advice offered to Japan to rebalance and liberalise its economy weakened its international competitiveness and provided respite to troubled firms in US and Europe. Japan’s GDP ranking has subsequently dropped from 2nd to 4th while its share of global GDP fell from 18% to 5%.

China-leaning economists thus have reservations about Western policy advice. Han Feizi argues “Western analysts have been harping about China’s unbalanced economy since before the 2007-08 Global Financial Crisis. The fingernail-on-chalkboard screech has just gotten louder over time. To be fair, rebalancing will eventually happen…However, the fact that Western consensus has been calling for rebalancing for at least 15 years should give us pause. When the Global Financial Crisis threatened to take down China’s economy, the country was only 48% urbanized (versus 65% today). Did economists truly believe that China would have been better off building out a social safety net? Or was it some sort of contrarian consensus that drew Western analysts like moths to flames – anything, as long as it’s contrary to whatever it is the Chinese Communist Party is doing. Even better if it’s wrapped in sanctimony and virtue signaling. Who doesn’t favor giving households a greater share of economic output? Who doesn’t want better healthcare for the hardworking masses? Why are resources being diverted to corrupt and inefficient state-owned construction companies? The proof, however, should be in the pudding”.

Han Feizi points out “over the past 15 years, China’s urban population increased by 17 percentage points, up to 238 million people. Household consumption increased over 204%, significantly outperforming all major economies. Over this period, household consumption’s share of GDP barely budged from a reported 35% in 2008 to an estimated 39% in 2023…No amount of redistribution could give households more spending power than turning rural workers into urban ones…China’s 65% urbanization is where Japan, the EU and South Korea were in 1962, 1973 and 1985, respectively. Given that 92% of Japanese, 81% of South Koreans and 75% of the EU currently live in cities, China could have another 10-25 years of urbanization to go. It is hard to know where urbanization finally peaks in China. We suspect it will be closer to the EU’s 75% than to Japan’s 92% if for no other reason than to maintain rural labor for food security. We can, however, be reasonably confident that we can expect another decade of investment-driven growth”. “Investing in urbanization and its attendant manufacturing industries…helped China around the inequality peak in 2010. Inequality surged in the reform era as commercial opportunities exploded in urban China…As urbanization passed the 50% mark, however, China suppressed continued population growth in first-tier cities, pushing growth into second-and third-tier cities, thus evening out economic discrepancies between provinces. Since 2010, China’s Gini coefficient has been steadily falling. At around the same time, as the countryside emptied out, farm consolidation and mechanization resulted in rural incomes outgrowing urban incomes. The urban/rural disposable income ratio fell from 324% in 2003 to 243% in 2022. Between 2003 and 2022, the number of Chinese cities with over two million people more than doubled, surging from 32 to 72, while total prefecture-level cities barely changed, increasing from 284 to 297”.

Han Feizi points out “Hukou[22] reform, or lack thereof, is a favorite hobbyhorse of the contrarian consensus, providing nearly limitless opportunity for virtue signaling and sanctimony. Of course, the costs of unregulated population concentration are rarely addressed. The hukou system has helped China avoid the slums and shanty towns that plague cities across the Global South. Population concentration in the US has contributed to political estrangement between coastal elites and the forgotten masses in flyover country. Economists have blamed even more intense population concentration in Japan and South Korea for falling birthrates and diminishing economic vitality. Keeping China’s population spread out by growing small and medium-sized cities complements the rural rejuvenation policy that aims to prevent decay and poverty in the countryside. If rural residents move to cities closer to home, links to the rural economy can be better maintained”. Hence, “through sequenced hukou reform, China has been growing medium-sized cities – those with populations between 2 and 6 million – while keeping a lid on megacities with populations over 15 million…In August, the Ministry of Public Security (MPS) accelerated hukou reform for all but 24 of China’s largest cities. The ministry ordered local governments to abolish hukou restrictions for cities with fewer than 3 million people and relax restrictions for cities with 3-5 million”. “China is clearly trying to avoid population overconcentration. The top ten cities in China account for 11% of the population while the top 20 account for 17%. This compares favorably to the US at 26% and 38%, respectively and very favorably with Japan and Korea where 45-50% of the population is concentrated in one or two cities”.

Han Feizi notes “a dense web of high-speed rail (HSR) is key to this urbanization plan. China currently has 42,000 kilometers of HSR accessing all first-, second-and third-tier cities in a 4×4 grid. The plan is to increase HSR density to an 8×8 grid, 70,000 kilometers in length, extending coverage to fourth- and fifth-tier cities by 2035”. While

“China already has two-thirds of the world’s HSR…On a land area basis, China’s HSR network covers a fraction of country compared to systems in South Korea, Germany and Spain…network effects of further HSR expansion should result in increasing rather than diminishing returns…Distributed urbanization through HSR buildout is nothing less than a complete re-engineering of physical China, overturning millennia of political dogma”.

In tandem with this, Han Feizi notes “over the past two decades, investment as a percentage of GDP has been far higher in inland provinces. Only one of the top ten fastest-growing provinces in the past decade (Fujian) has been coastal and none in the past two decades…Much of the debt China has accumulated has been from local government infrastructure spending with the most impoverished provinces racking up the largest deficits. Tibet’s local government budget deficit was an astonishing 113% of its GDP in 2022 versus 9.7% for local governments as a whole. Sparsely populated western provinces like Qinghai, Gansu and Xinjiang all racked up large deficits as they invested in infrastructure projects like Tibet’s Ya’an–Nyingchi HSR line currently under construction. China has chosen to leave no province behind in its infrastructure buildout. While many of these projects do not make commercial sense (e.g. Tibet’s population is only 3.5 million people), the Communist Party evidently believes that investment in lagging provinces is important for political integrity and national unity. While these investments have dubious financial returns, they almost certainly kept many residents from migrating to coastal provinces. Ultimately, this is a massive transfer payment from rich coastal provinces to the poor interior. The return is political cohesion and, to the horror of the contrarian consensus, social justice”. In this context, “while still problematic, inequality, as measured by the Gini coefficient, has steadily fallen since 2010 largely as a result of massive investment in urbanization, pushing people into cities and pushing cities up the tiering ladder. Today, it would not be strange to consider Chengdu, Chongqing and Hanzhou first-tier cities and peers of Beijing, Shanghai, Guangzhou and Shenzhen. Tier-two cities like Xiamen, Kunming and Suzhou are often considered more livable and trendy in their own quirky ways. Dark-horse cities like Hefei and Ningbo have exploded out of nowhere to become rising tier-two stars. With the installation of high speed rail, tier-three cities like Dali, Lishui and Zibo compete to become the next its tourist destination. China also poured resources into stamping out last-mile poverty”.

China’s policy thinking incorporates a determination not to repeat the policy “errors” that led to poor outcomes in Western societies. As Han Feizi explains, “China wants America’s Silicon Valley, but regulated; Japan’s car companies, but electrified; Germany’s Mittelstand, but scalable; and Korea’s chaebol conglomerates, but without political capture. It wants to lead the world in science and technology, but without cram schools. A thriving economy, but with common prosperity. Industry, without air pollution. Digital lifestyle, without gaming addiction. Material plenty, without hedonism. Modernity, without its ills. This is, of course, a wish-list and unrealistically ambitious”.

David P. Goldman and Uwe Parpart notes “the two sessions in early March – the National People’s Congress and the Chinese People’s Political Consultative Conference – took no macroeconomic action of significance, to the consternation of pundits who expected dramatic action from Beijing in the form of monetary ease, or consumption stimulus, or a property bailout”. “Beijing, by contrast, has little interest in the obsession of Western macroeconomists with demand management and focuses on industrial policy”. “China’s leadership focused single-mindedly on the transformation of Chinese industry through new technologies. It asks for and will give no quarter to America’s technology blockade, relying on an all-country effort to achieve self-sufficiency in semiconductors and other key technologies. Among other measures, it added another US$27 billion for a semiconductor industry fund to its already massive commitment and announced a 10% increase in the national science budget”.

In addition, David P. Goldman and Uwe Parpart notes the “Communist Party of China has a deep political interest in rectifying the enormous disparities of wealth and income that arose from the great wave of urbanization…The minority of Chinese who live in Shanghai, Shenzhen, Guangzhou, Beijing, and other Tier 1 cities already have a living standard close to that of the industrial countries, while much of the country has lagged behind…Beijing’s goal “is to make the pie bigger by narrowing the gap between urban and rural areas and narrowing regional differences…Satellite cities, new urban areas, and sub-centers are some of the solutions, but these ultimately depend on the decentralization of large, medium and small cities that are independent of metropolitan areas…Between 2003 and 2022, the number of cities with more than 2 million people in China increased from 32 to 72, which is a good start”. “The Communist Party will not spend vast amounts of state resources to bail out property companies, which coasted on the urbanization wave that made a house in downtown Shenzhen ten times costlier than an identical house in the Chengdu suburbs…Supporting the windfall gains of wealthy homeowners in tier 1 cities is not on Beijing’s agenda. Instead…the burden of adjustment will be shared among all the relevant parties: property company stockholders, bondholders, banks and homeowners”.

In my view, China chose not to follow the option of unlocking nominal GDP growth by following the US path of hollowing out manufacturing, privatising government operations and tolerating rising financial, healthcare, transport and education costs (Baumol’s cost disease) to drive economic growth. China has a different philosophy favouring price stability. Rather than expand welfare, the government intervenes to cap prices for services such as transportation, medicines, telecommunications and education. China could also have moved aggressively on privatisation to maximise fiscal revenues and to downsize state-owned enterprises and government administration. But this would have increased the costs of living and aggravate inequality. It is worth noting that though the West has privatised and downsized the civil service, their economies have become more reliant on fiscal and monetary stimulus to sustain economic growth. Though big bang financial liberalisation could have an immediate positive impact on economic growth, China has preferred a gradual and controlled approach, well aware of its vulnerabilities to speculative attacks. China is trying to avoid the Western fate of an anorexic and financialised economy.

Chinese modernisation and the new productive forces

China’s economic plans tends to be guided by concepts[23] rather than by theoretical rigour; and to be information and technology-centric[24] rather than fiscal and monetary-focused. Recent themes guiding its development strategies include informationalisation, dual circulation and common prosperity. However, Western economists tend to be sceptical about economic plans without the rigour of formal macroeconomics. This results in an international debate on China’s economic model[25] that is often at cross-purposes.

Though China’s policy-buzzwords change, it is underpinned by the constant principle of Chinese modernisation. Xi Jinping has repeatedly emphasised that “Chinese modernization works and that it is the only correct path to building a great country and rejuvenating the Chinese nation”. In 2023, Xi Jinping elaborated his concept of modernisation covered (1) modernization of a huge population, (2) modernization of common prosperity, (3) modernization of material and cultural-ethical advancement, (4) modernization of harmony between humanity and nature, and (5) modernization of peaceful development.

China’s latest strategic thrust is to manage structural transition by powering up new industries to replace the traditional growth of growth such as property and infrastructure. Kinling Lo notes in a visit to Heilongjiang province on September 2023, Xi Jinping identified new energy, new material and hi-tech manufacturing as industries that should become the new productive forces. In December, at the central economic work conference, “it was ranked first in a set of nine economic tasks”. Subsequently, “Heilongjiang has published a game plan to speed up the forming of new productive forces, and the province has identified 24 industries – many linked with hi-tech manufacturing- to receive more support”. He “referred to the concept as a leading factor for promoting high-quality development of the Chinese economy” and subsequently elaborated “the new productive forces [will] lead innovation and break the development model from traditional economic drivers…original and disruptive home-grown innovation would incubate new industries, new models and new drivers to help the country achieve scientific and tech self-reliance to fight the battle in core technologies. [New productive forces] will guide the building of a modernised industrial model…adding that innovation must be practically and substantially applied to industrial and value chains”. As a result, “in recent communications, China’s leaders and media have frequently used the phrase new productive forces when discussing how to revitalise and transform the economy – itself a hot topic in a period where growth has slowed and officials have been struggling to find momentum”.

Views differ on whether the new productive forces would generate sufficient growth to overcome stagnation in traditional sectors. Wang Cong and Liu Yang notes in November 2023 “the added value of high-tech manufacturing above designated size increased by 6.2 percent year-on-year, 4.4 percentage points faster than that of the previous month. High-tech products such as solar cells, service robots, and integrated circuits continued their stellar performance, with their output rising 44.5 percent, 33.3 percent, and 27.9 percent, respectively…That helped promote high-quality development in China’s foreign trade, with the upgrade of the export structure. In the first 11 months, China’s exports of NEVs, lithium batteries, and solar cells – collectively known as the three new items of China’s exports – jumped by 41.7 percent to about 79.9 billion yuan” They note Wang Dongwei, vice minister of finance said “finance departments of all levels have prioritized fiscal spending in sci-tech fields. Between 2018 and 2023, national fiscal expenditure in sci-tech grew from 832.7 billion yuan ($115.94 billion) to about 1.06 trillion yuan, with an annual growth rate of 6.4 percent on average”. “Between 2020 and 2022, China’s total social expenditure in research and development jumped from 2.44 trillion yuan to 3.08 trillion yuan, ranking second in the world for many consecutive years”. “Highlighting the great contribution made by new productive forces to economic growth, China’s world-leading 5G industry is estimated to have directly driven a total economic output of 1.86 trillion yuan in 2023, an increase of 29 percent from that of 2022, according to the Ministry of Industry and Information Technology”.

Han Feizi notes in 2023, China “added over 200 GW of solar generating capacity and 300 GW of solar manufacturing capacity. China also made significant strides in wind and nuclear power…clean energy industries accounted for 40% of China’s GDP growth in 2023”. He asserts the new three sources of growth – solar, batteries and EVs – “will transform China’s economy in the coming decades”. “This is where magical things happen – mass desalination, indoor crop production, “costless” environmentally friendly smelting of metals. This is truly transformational stuff and given the pace of the buildout, we could start seeing some of it happening within five years”.

Weijian Shan notes “in 2022, the Green Economy and the Digital Economy added 4.7% to China’s growth rate, more than offsetting the negative contribution of 3.7% by the real estate sector. Indeed, China leads the world in the industries enabling, and enabled by, the Fourth Industrial Revolution – green energy, digitalization, industrial robots, artificial intelligence. These are all growth industries, dominated by the private sector (with the exception of high-speed trains and to some extent semiconductor foundries). China has surpassed Japan as the largest exporter of cars this year – and a quarter of those are electric vehicles. In lithium batteries, an essential component of electric vehicles, mobile phones and other industries on this list, China went from zero percent of the global market in 2005 to 63% – nearly two thirds – today. It has marked similar growth in wind power and industrial robot installation. I should note however that despite their large market share and rapid growth, we don’t consider most of these sectors attractive for private equity investment, because they are prone to over-competition and overcapacity, and therefore low profitability. China’s manufacturing is deepening, i.e., it is moving up the value chain into the production of higher-value, higher-technology products and components. Its total share of the world’s manufacturing value-added keeps rising, now representing 31%… in 2019, I noted that China’s value-added to Apple iPhones represented only about 4% of each phone’s retail value. An article published…this year notes that value-added number has climbed to 25%”.

Max J. Zenglein notes the launch of Beijing’s Made in China 2025 strategy in 2015 marked “a departure from its comparative low-cost manufacturing for original equipment manufacturers (OEM) towards more innovation-driven growth. China has made tremendous progress, and its companies are directly competing with those from advanced economies. Chinese companies have significant global market share in many sectors, from high-speed rail to telecommunication equipment. In emerging sectors such as electric vehicles and battery production, China has leveraged its large market to build production capacity to leapfrog foreign competition…But high-tech competition is only one aspect. The Chinese leadership is not about to give up the nation’s strong position in manufacturing by allowing production and assembly operations to progressively relocate to cheaper destinations offshore while focusing on higher-value pre- and post-production activities such as innovation and brand development…For Beijing, industrial upgrading is not only about technological leadership and reduced dependence on foreign technology but also about modernizing traditional manufacturing. Industrial transformation and upgrading also means that China aims to defend its competitive position in low-end sectors. This strategic move is crucial for enhancing the resilience and safety of China’s manufacturing base and supply chains. Annual investment growth in traditional consumer-oriented sectors has outperformed overall investments in manufacturing for the bulk of the last decade. Despite already occupying a dominant position in global markets, the unweighted average investment growth for information and communication technology, furniture, recreational products, leather (including shoes), and garments was 10.9% compared to 9.1% growth in overall manufacturing. “In May 2023, President Xi Jinping emphasized the imperative of advancing the transformation and upgrading of traditional industries. He rejected categorizing them as low-end. Instead, the crucial role of traditional industries in the national economy and their role as a foundation for building a modern industrial system anchored in the real economy were emphasized”. This term covers (1) Intelligent manufacturing with “accelerated use of intelligent manufacturing and smart factories, including in small and medium-sized enterprises. The focus extends beyond manufacturing to include digitalizing supply chain logistics and improving the digital infrastructure in…China’s highly competitive industrial clusters”; (2) Green manufacturing with the government implementing policies to strengthen green factories “to reduce water usage and more efficient use of inputs, including materials recycling; and (3) Network manufacturing “to increase efficiency and encourage cross-industry application of technology. Strengthening research, design, logistics, and finance networks facilitate new models such as customization, shared manufacturing, or whole life cycle management”. Broad goals were set in intelligent, green, and integrated manufacturing in traditional sectors including increasing the penetration rate of digital R&D and design tools in industrial enterprises to 90% , while decreasing wastewater usage by 13% from 2023 level. “These measures aim to help defend its global competitiveness in traditional manufacturing and prevent the hollowing out of the industrial base experienced in advanced economies”.

Max J. Zenglein notes the transformation and upgrading of traditional industries and growth of emerging industries are seen as mutually reinforcing. “The modernization drive offers diverse application scenarios for emerging technologies, such as the new generation of information technology and intelligent manufacturing, but also creates an expansive market space for Chinese suppliers of related high-tech equipment and technologies. This interconnected relationship highlights the symbiotic nature of their development, emphasizing how advancements in traditional sectors can catalyze and provide fertile ground for China’s global high-tech ambitions”; an example being the production and extensive use of industrial robots. Max J. Zenglein notes “this policy direction also has implications for emerging economies. Under such conditions, replicating China’s successful model for export-oriented development might prove more difficult. Defending lower-value manufacturing through implementing industrial upgrading while moving up the value chain aims to enable China to secure all aspects of the value chain. This means that China is simultaneously competing with both emerging and advanced economies. It also suggests that efforts to improve economic security in Western countries could be slowed down or become more costly as China remains competitive in various sectors”.

Kinling Lo notes “however, the output of China’s hi-tech manufacturing sector grew only by 2.7 per cent last year, the lowest level of growth since the National Bureau of Statistics began releasing data in 2018. While investment in hi-tech manufacturing grew by 9.9 per cent last year – beating the 6.5 per cent increase in all manufacturing – this was the slowest pace of growth since 2015…China has become the second-largest spender on R&D – though despite heavy investment, it still lags behind the US. However, Huang Qifan, a former mayor of Chongqing…said China’s biggest choke point in modernising its economy lies in limitations in developing productive services- an umbrella term describing sectors and technologies primarily designed to enhance traditional manufacturing, such as cloud computing or financial and legal advice. If you have a large manufacturing sector but the proportion of productive services is low, you can only produce middle- to low-value manufacturing products”. Jon Taylor of the University of Texas thinks “Xi is no longer willing to tolerate an underperforming economy, hence his emphasis on the expanding technological innovation capacity…Xi has stated that the party will need to develop new theories centring on ‘new productive forces, signalling that the party needs to rethink some key aspects on how it runs China’s economy – including state ownership and resource allocation”.

William Hurst[26] “doubts China is making the right bets. He argues Beijing’s push to advance sectors such as aviation, biotech and artificial intelligence has not been sufficiently successful to either push technological boundaries in those industries or generate more employment. If it doesn’t succeed, then we just have yet more debt, yet more distortion in the economy…If it does succeed, we have the potential of having yet more overcapacity…So I don’t see that it’s really going to be this amazing shift that will suddenly make the Chinese economy more competitive globally”.

Some challenges have emerged in relation to China’s modernisation strategy[27]:

  • Strengthening the role of CCP. Max J. Zenglein and Jacob Gunter notes “Xi’s economic policies encompass Marxist-Leninist elements with a much stronger role for the CCP. The new political economy promotes an all of nation model that engages in a 21st century type of economic and technological mass mobilization. Party-state controls and guidance over economic actors were extended drastically, ensuring alignment with contributing to reaching national strategic goals. The measures include a mix of discipline system and incentives. Xi Jinping’s policies focus less on profitability of companies or enriching the middle class. Instead, economic resources should be geared toward strategic sectors in the real economy – mainly high-tech manufacturing and emerging technologies such as AI. Sectors such as the real estate sector or consumer internet are seen as non-strategic and/or destabilizing, resulting in massive crackdowns over the past two years. More party guidance has significant implications on the business environment of China’s private sector and entrepreneurs who occupy key roles in reaching high-tech supremacy. Ownership and governance models that help Beijing influence the steering wheel of companies have materialized, with golden shares securing veto-rights in some firms while party influence and window guidance pull on strings behind closed doors. Meanwhile, sticks have been brought to bear against firms unaligned with Beijing’s goals, with crackdowns and rectification campaigns, blocked IPOs, and seemingly capricious (but actually orchestrated) regulatory enforcement beating prominent firms into line while sending a message to everyone else. At the same time, for the firms already in line with Beijing’s vision, carrots are ripe for the picking, like advantageous stock listings, protection from foreign competition, and access to everything from subsidies and cheap financing to the Little Giants Initiative[28] – a government incentive to foster world leading high tech small and medium sized companies”.
  • Managing the transition. Chen Jing notes at the 2023 Politburo meeting and the Central Economic Work Conference (CEWC), the policy theme was seeking progress while maintaining stability, promoting stability through advancement, and establishing the new before abolishing the old. This recognised the need “to rectify the problems in the transition between China’s new and old economic drivers. He explained areas which were once “key drivers of fast economic growth” had come under policy pressure for “abolishing”. This includes the “real estate market…worsening local finances due to the failure of the debt financing model, the revamping of internet firms to prevent the disorderly expansion of capital, as well as the education and training industry that was hit hard by the double reduction policy. Some fell into a rut because of the unsustainability of their original development model, and are still experiencing the pangs of a transitional phase, while others are in urgent need of a restructuring after years of wild, unguided development. But before establishing a healthy development model, their momentum was seriously impacted by industry restructuring across the board”. The old economic drivers “have now become hindrances to economic recovery and could even be hidden risks that threaten the stability of the system. The CEWC highlighted the need to prevent and defuse risks related to the real estate sector, local government debt, and small and medium-sized financial institutions…as areas of focus for economic work next year”. “The conference also placed improving basic systems ahead of accelerating the building of a new development model for the real estate sector, suggesting the need to set up a basic system for the real estate sector before gradually building the new model. As China’s economy transitions from a period of rapid growth to a period of high-quality development, the driver for growth would gradually switch from investment to consumption, and from the traditional manufacturing industry to the high-tech industry. The real estate sector would undergo a major reshuffle, and local governments would also need to move away from a finance model reliant on land revenue…These series of changes would not happen overnight, and while breaking free from the current development models, the issue of how to reduce the shock and impact that arises from change as well as how to stabilise and actualise the industrial shift and upgrading would certainly be a challenge facing the policymakers in the next year and beyond”. Chen Jing adds “after going through three years of major changes due to the pandemic, businesses are hoping for even clearer policy guidance, while investors are hoping for an even more stable business environment…However, regarding what is to be established before abolishing, and how to go about establishing, the closed-door conference over two days did not offer a clear and detailed plan. But the conference did point out the need to enhance the consistency of macroeconomic policy orientation, referring to the strengthening of coordination across policies to create synergy. The effective planning and management of policies across different departments would somewhat help clear obstacles for establishing the new before abolishing the old”.
  • Over-investment and excess capacity. Excess is a key feature of China’s approach. Han Feizi notes “in the EV, battery and PV industries, China incentivized investment by offering generous subsidies and tax benefits to all takers (at least all domestic ones) two decades ago. This resulted in hordes of market entrants who competed ferociously with each other, frantically innovating and driving down prices (as well as net income). Underwritten by China’s massive market, barely profitable industries not only scaled up aggressively but were forced to innovate by the ruthless competition”. “In the EV, battery and PV spaces, however, where no legacy player had an entrenched lead, China has managed to run the tortoise and hare strategy in reverse – scale up so fast and so high that catching up becomes impossible. In industries with entrenched leaders, where China started from behind – semiconductors, commercial aircraft, biotech – the tortoise strategy is the only option”. “China’s returns from uneconomic investment in infrastructure and urbanization (housing, high-speed rail, roads and bridges). Investment in solar infrastructure, batteries and EVs has been and will likely be no different. In China, looking for returns in the financial statements of companies – or even entire industries – is a fool’s errand. It’s all in the externalities. In the number of cities that can now claim first-tier status. In the second-tier cities that are now cooler – in their own funky way – than first-tier cities”.

Viewed through Western lens, China’s malinvestments results in visible excesses such as ghost towns or junkyards filled with abandoned electric bicycles and EVs, and zombie firms. From a corporate perspective, these are typical outcomes of China’s adoption of tech strategies like rapid prototyping or moving fast and breaks things. Under these strategies, the costs of excesses are minimised and dwarfed by the tangible gains from China’s ability to execute, innovate and scale at rapid speed. These features make China competitive and disruptive. In addition, Han Feizi notes Chinese cadres are expected to “not only to formulate policies but also to drive outcomes, whatever they may be – clean up a stream, shut down germanium exports, increase university enrollment, build high speed rail. Because cadres in China are expected to be action oriented, like MITI officials in their heyday, optimal second-best outcomes become targets to be met rather than end products of rearranged policies….America’s entrepreneurs are no match for China’s entrepreneur/cadre partnership. Gina Raimondo and her bureaucrats at the Department of Commerce may be a start but, so far, they are still bureaucrats and not cadres and Huawei’s running circles around them”.

We can thus compare China’s approach of doing too much versus the West’s approach of doing too little. China can experiment and move quickly because it is tinkers with projects and rules. If the projects or rules fail, China’s unique advantage is that it can quickly abandon the project or modify the rules. As an outside investor and competitor, the West tires of the constant chopping and changing in China. It regards abruptness as a sign of authoritarianism and disruption as a threat to its legacy businesses. In contrast, projects in the West are plagued by delays, non-competitiveness and lawsuits.  

These differences are reflected in an assessment of the major global economies. The major global economies all have high debt levels and bloated central bank balance sheets. But only China can justify its excesses as most citizens own their homes and enjoy the amenities of world-class infrastructure. The problem for the West is that they have little to show to their citizens for their spending, debt and monetary accommodation. Signs of economic stagnation are visible – living standards have fallen, infrastructure is derelict and businesses continue to need protection.

This time though, the challenge for China is that all its problems are crystalising at the same time – property and equity market, private sector and local government debt, geopolitical conflict and decoupling, and de-dollarisation and deleveraging. China is having to face the big industry shake-out from excess capacity at the worst possible time. This could have negative implications on employment, debt and output which will cast a pall on China’s growth over the next three years. The thing is that when China’s industry sneezes, the world is likely to catch a cold.

China’s rise as the world’s leading industrial nation

Richard Baldwin notes “China’s industrialisation is unprecedented”. It took “the US the better part of a century” to surpass the UK just before WW1. “The China-US switch took about 15 or 20 years”. In 1995, “China started the race a bit ahead of Canada, Britain, France, and Italy. China passed Germany in 1998, Japan in 2005, and the US in 2008. Since then, China has more than doubled its world share while the US’s share has fallen by another three percentage points”. Richard Baldwin notes in terms of share of global gross production in 2023, “China (with 35%) is followed by the US (12%), Japan (6%), Germany (4%), India (3%), and South Korea (3%). Note how the world has changed. Only three of these are long-established industrial economies; the other three are newly industrialised economies”. Italy and France have more than 2%. “Taiwan, Mexico, Russia, and Brazil now have higher gross output than the UK. Canada is further down the ranking, in 15th place”. However, “China’s rise has slowed and looks to have stagnated at about a third of world output”. Similarly, China’s share of world manufacturing exports rose from 3% in 1995 to 20% by 2020. However, the impact on G7 economies was not so dramatic due to “the meteoric rise in Chinese domestic consumption, which has absorbed an increasing share of its manufacturing production since 2004…China’s export to production ratio, having peaked at 18% in 2004, is 13% in 2020 – almost back to its 1995 level of 11%”.

Richard Baldwin points out “in 2020, the US was about three times more exposed to Chinese manufacturing production than vice versa…in the mid-2000s, China’s dependence on the US was ten times the reverse dependence, but the asymmetry has narrowed substantially…asymmetry in supply chain reliance between China and other major manufacturing countries. Politicians may wish to decouple their economies from China. These data suggest that decoupling would be difficult, slow, expensive, and disruptive – especially to G7 manufacturers…Until the mid-2000s, China was a typical offshore destination: a net importer of intermediate inputs and a net exporter of final goods that embodied the imported inputs. From about 2002, China became a large net exporter of intermediate goods as well as final goods”.

Max J. Zenglein notes “China’s integration into the global economy led to a rapidly rising share of manufacturing in its economy. After peaking at 32.4% in 2006, the share of manufacturing in China’s GDP has been gradually declining. But after falling to 26.3% in 2020, the share has again increased. Its share remains significantly higher than Germany’s or Japan’s, which stand just below 20% of GDP and Vietnam at 25%. China has developed highly competitive industrial clusters, enabling it to reach a dominant position across diverse manufacturing sectors and putting itself at the center of global supply chains and production networks. As a result, over the past 20 years, China’s share in global manufacturing increased from around 5% to over 30%, while the share of Organisation of Economic Co-operation and Development (OECD) countries fell by around half over the same period”.

Michael Pettis mentions “manufacturing represents 16 percent of global GDP, but only 11 percent of U.S. GDP, 9 percent of Canadian GDP, 8 percent of UK GDP, and 5 percent of Australian GDP. These are all advanced economies that have historically run trade deficits. On the other hand, it represents 18 percent of German and Swiss GDP, 20 percent of Japanese GDP, 21 percent of Singapore’s GDP, 26 percent of South Korean GDP, and 34 percent of Taiwan’s GDP. Not coincidentally, these are all advanced economies that have historically run persistent trade surpluses”.

Klaus S. Friesenbichler,  Agnes Kügler and, Andreas Reinstaller highlights “Chinese export dominance is no longer confined to low-tech, low-wage sectors, as was the case in the 1990s and early 2000s. Chinese firms have become direct competitors to firms in advanced economies and have entered into active competition with those firms in their domestic markets…total direct government subsidies to Chinese listed companies increased more than sevenfold between 2007 and 2018, from $4 billion to $29 billion…since the introduction of the Government Guidance Funds in 2012, public support for state-owned enterprises has increased from USD $7.9 billion to around USD $418 billion in 2016, reaching USD $850 billion in 2022. These developments sparked controversy both domestically and internationally. China has been accused by its trading partners of unfairly favouring its domestic companies with subsidies, putting foreign companies at a disadvantage in the competition for future technologies. All this adds fuel to debates on trade policy and the impact of China’s industrial policies, such as its distortionary use of subsidies, intellectual property rights, and market regulations…China’s industrial strategy initiative aims not only to further technologically upgrade the Chinese economy, but also to achieve independence from foreign suppliers in core products such as IT, aerospace, and biotechnology, while further promoting Chinese exports”. They agree Europe needs to take seriously the threat posed by these “undesirable developments in competition with Chinese companies. It would be highly inefficient to try to decouple from China or reverse the situation of subsidised competition, but failing to respond can be just as dangerous for local economies. First, it seems important to maintain the ability of European exporters to technologically upgrade, diversify and, where possible, stay ahead of international competitors and protect their intellectual property from Chinese competitors. Second, the EU should encourage direct investment by Chinese technology leaders in the EU to promote reverse knowledge spill-overs. Third, it is also important to act against market-distorting practices that are prohibited by the WTO”.

Collision course with the West[29]

Max J. Zenglein and Jacob Gunter note “Xi’s recalibration of the political economy first and foremost aims not at boosting China’s overall development, but rather at securitization – the pursuit of resilience in a geopolitically challenging environment – as the precursor to national rejuvenation. To realize such a vision…the CCP will endeavor to localize supply chains and close technology gaps to secure value chains within China’s own borders. The goal is to make it impossible for any other nation to hold China down through access to resources, technology, capital, or markets…Where China cannot localize supplies, such as for oil, gas, soybeans, iron ore, and critical raw minerals, the CCP aims to diversify suppliers to build resilience. The party state also seeks to diversify and develop export markets, and to take a central role in the global economy, especially as the self-proclaimed leader of the developing world”. “Internationally, China’s relationship with liberal market economies is moving from integration to intense competition – and potential conflict. Simultaneously reconfiguring the domestic economy and China’s international economic relations is generating frictions…Policymakers and corporate leaders across the world are faced with a new environment in which China-induced risks and challenges abound. These encompass economic and tech competition, but also competition over markets and influence in the global south…It is likely that already significant differences between China’s economic model and those in Europe and other liberal market economies will continue to grow and create more friction. Observers should shed any wishful thinking of a return to pragmatism and focus less on hoping that Beijing will course correct itself. Instead, it is necessary to consider their own strategy to deal with a changing China”.

Max J. Zenglein argues “China-centered globalization, the central paradigm underpinning the last two decades of global business activity and trade policies, is becoming more contested. Governments in major economies in the European Union, US, and Japan have rolled out new policies to reduce their high dependency on China for manufactured goods, now viewed with growing political discomfort. De-risking, re-shoring, friend-shoring, or China+1 are emerging strategies shaping the next era of globalization, emphasizing economic security and systemic competition over fostering trade liberalization. Despite a growing sense of urgency triggering policy adjustments in many countries, strategic shifts to reshape globalization have only just started. The resulting changes are poised to challenge China’s dominant role in manufacturing, but China is not sitting idly by and is itself trying to expand and deepen its position in the global geoeconomic architecture. The cocktail of policy responses risks being explosive for global markets”.

Max J. Zenglein explains China is “adapting to the changing landscape for global trade” by strengthening technological self-reliance, supply chain securitization via stricter localization requirements and onshoring of supply chains in China, and market diversification notably through the Belt and Road Initiative…China’s production power and scale of manufacturing capacity will continue to shape this period of re-globalization. Diversification away from China to producers in alternative markets are likely to remain dependent on Chinese-made inputs in the production process. Despite efforts to reduce reliance on Chinese manufacturing and sourcing, its industrial capabilities, cost efficiency, and comprehensive supply chain infrastructure ensure China remains deeply embedded in supply chains even if direct dependence is reduced. Economic diversification in service of national security will still need to make economic sense for companies or be prohibitively expensive. Of course, companies cannot escape the new realities affecting global trade and require a strategic reassessment of supply chain risks. But equally, they cannot afford to abruptly abandon the efficiencies of globalization despite growing geopolitical frictions threatening global supply chains and a greater emphasis on economic security. A significant escalation in tit-for-tat trade tensions or over geopolitical flashpoints could change the economics behind and speed of diversification. Striking the right balance between risk mitigation and efficiency will be fundamental in getting economic security right”.

Max J. Zenglein thinks “the desire to reduce trade dependency on China in Western countries will persist as geopolitical tensions will unlikely subside in coming years. But even in seemingly unsophisticated consumer goods, the erosion of China’s competitiveness and dominance in the value chain is likely to be gradual. It will get even more complicated in sophisticated industries such as electronics. Chinese industrial policy will try to make the process as costly as possible. Any rapid and broad de-risking efforts are likely to fail to a large extent. China’s economic competitiveness can only be forcefully reduced in a rapidly escalating trade war, including massive tariffs or in the event of military conflict breaking out. Such gloomy scenarios causing havoc to globalization would be tremendously costly and signify a major shock to the global economy. But in the absence of such worst-case scenarios, relocating supply chains cannot be expected to happen in a matter of years but rather decades. China also did not get to its current role within a few years but only after substantial investments, domestic reforms, and international cooperation. China’s dominant position in large parts of the supply chain is far from retreating, complicating any meaningful diversification effort in other parts of the global economy. The process will be highly strategic with each actor trying to maximize its own position in terms of improving economic security while minimizing the associated costs”.

Max J. Zenglein notes ‘with the growth outlook for China’s economy not improving much in 2024, this has raised concerns about mounting global overcapacities and the flooding of global markets with cheap Chinese exports. The result will be brutal price competition and market distortions. China’s share in global manufacturing has surpassed 30%. This will result in rising trade tensions as Chinese companies battle for more global market share. Falling prices and the abundance of Chinese-made final and intermediate products ranging from low- to high-tech goods and services will challenge the financial viability of companies. This will more than complicate efforts to break the reliance on China’s highly competitive manufacturing sector. It also serves as a reminder that improving economic security comes with a price tag…This underscores the intricate balance between bolstering economic security and maintaining economic competitiveness. The priority for Western countries will be to prevent the loss of industrial manufacturing capacity in high-tech areas, which China is challenging. Defensive measures combined with industrial policy will seek to stop China from further eroding the rest of the world’s manufacturing base. Advanced economies will also pursue partnering up with emerging economies to begin the gradual process of diversification…Without a doubt, globalization has started to reorganize itself. But this is only the beginning of a highly complex and fluid process. Setting false expectations for speed might result in prohibitively costly economic policy decisions. More importantly, it is about identifying the right priorities and not disbanding economic competitiveness entirely”.

Jeff Pao notes “after railing at Beijing for a decade about Chinese dominance in the solar panel sector, Washington now is complaining that China heavily subsidized its electric-vehicle (EV) and semiconductor makers to boost global market shares – in the process creating overcapacity that also helped knock prices below competitors’ costs”. US officials have had “frank conversations with Chinese counterparts…China’s industrial overcapacity, which the Americans fear could flood international markets with cheap products…US officials will use the chance to express concerns about China’s use of non-market economic practices such as government subsidies”. For legacy semiconductors, China-leaning economists argue it is not subsidies but the US export ban that “forced China to shift to make legacy chips” and accuse the US of only wanting “to suppress China’s technological development and increase its own bargaining chips”. “Due to extra tariffs, the share of Chinese products in the United States’s imports fell from 22% in 2017 to 16% in 2022…the US restrictions also have created a chilling effect on the Chinese economy as global firms think diversified their investments to other countries to reduce their risks in China”.

William Pesek notes “the Financial Times reports that Biden’s trade team is warning Xi’s government against dumping goods as its overcapacity troubles worsen…Jay Shambaugh, US Treasury undersecretary for international affairs, as saying we are worried that Chinese industrial support policies and macro policies that are more focused on supply rather than thinking about where the demand will come from are both careening towards a situation where overcapacity in China is going to wind up hitting world markets. In particular, Biden’s White House worries about China’s deflationary pressures damaging advanced manufacturing sectors like electric vehicles, lithium-ion batteries and solar panels…the rest of the world is going to respond, and they’re not doing it in a new anti-China way, they’re responding to Chinese policy”.

Noah Barkin and Gregor Sebastian notes in 2024 “the China pact between German politicians, companies, and workers is beginning to show cracks. Some German companies, notably small and medium-sized enterprises (SMEs), have soured on the Chinese market because of geopolitical tensions, rising compliance costs, and policies that favor home-grown firms. Others that continue to do well in China, notably in the automotive sector, are coming under pressure in their largest market from fierce local competition. In July 2023, the German government published a China strategy that advocated for economic diversification away from China. Despite a souring mood, big German firms have continued to invest heavily in China in order to remain relevant in a cut-throat market and to insulate their China operations from escalating geopolitical tensions. In contrast to years past, however, this is now being accompanied by thousands of job cuts in Germany, in part to adapt to the switch to electric vehicles. German automotive supplier ZF Friedrichshafen, for example, is cutting up to 12,000 jobs in Germany, while seeking to boost the share of revenues it makes in China from 18 percent to 30 percent by 2030. This has led to protests by the company’s German staff. BASF and Volkswagen have also announced plans to downsize in Germany while increasing investment in China. The job cuts are a result of rising economic pressures at home, linked to high energy prices and rising regulatory hurdles, as well as a response to staff levels in Germany that are increasingly out of line with market dynamics. They also reflect a rapidly evolving competitive landscape with China that has seen Chinese companies like BYD and CATL accelerate past German rivals in the development and production of electric vehicles and batteries. The same dynamic is playing out in other sectors, like machinery, where Germany has long played a dominant role”. “Germany may be nearing a tipping point, where the political and corporate forces advocating for a deepening of engagement with China will gradually give way to a more defensive approach, including the embrace of protectionist trade measures at EU level and more robust industrial policies”.

Noah Barkin and Gregor Sebastian notes “three trends are likely to fuel this shift: falling German exports to China, shrinking margins and market share for German firms in China, and rising competition with China in global markets”. “There are signs that German exports to China are entering a period of structural decline due to shifting competitive dynamics in the car industry, China’s import substitution policies, and a localization wave by German firms in China…After peaking in 2022, exports fell by nine percent in 2023…Not all companies and sectors would be affected by a structural downturn in exports in the same way. In industries where China continues to lag, for instance measurement devices or pharmaceuticals, German firms may continue to benefit for years to come from a robust export business with China. But the window has begun to close in sectors like automotive and electronic equipment, where the competitive landscape is shifting. China’s imports of automotive parts, the second biggest sector for imports from Germany after cars, declined by 22 percent between 2021 and 2023. Germany’s electro and digital industry association ZVEI reported that between January and November 2023, German electronic equipment exports rose 3.8 percent globally but declined by 3.5 percent to China. For large firms, this may be offset by the sale of goods produced in China. But for the Mittelstand, the SMEs that form the backbone of the German economy, local production is not always an option….should these firms struggle to diversify their export markets – a challenge given the difficulty of replacing a market the size of China and given rising competition from Chinese companies in third markets – downsizing and insolvencies may be inevitable”.

Noah Barkin and Gregor Sebastian notes “the operating environment is likely to be far more challenging, with the margins and market shares of German firms in China coming under increasing pressure. Over time, this could undermine the narrative that made-in-China profits subsidize German jobs and innovation… Pressure on market share and revenues has put pressure on profits too, leaving less money to send back to Germany. This dynamic has been reinforced by companies re-investing their made-in-China profits in the country in a push to remain competitive. Bundesbank data suggests that a growing share of corporate earnings are staying in China. Companies like Volkswagen and German chemicals group BASF may never become German versions of Nestlé – the Swiss food and beverage company that records less than two percent of its sales in the Swiss market. But the firms are in the process of reducing their footprint in the German market while increasing China-based jobs, R&D and, in some cases, production of goods destined for export. The surge in investment in China, and recent wave of downsizing in Germany, suggests that a gap is emerging between the financial interests of some German corporations, on the one hand, and the interests of their Germany-based staff and the broader German economy, on the other”.

Noah Barkin and Gregor Sebastian argues “lastly, German companies face a new era of fierce competition with Chinese rivals in third markets, from Latin America, the Middle East and Southeast Asia to Europe…In motor vehicles, China is catching up quickly, and in exports of advanced manufacturing goods, China has already surpassed Germany. This could reinforce the view of China, in German corporate boardrooms and among German workers, as a source of unfair competition that is undermining German jobs and prosperity. A large share of China’s gains have come in emerging markets (most recently in Russia after German firms pulled out of the market following Moscow’s invasion of Ukraine) due to price competitiveness and policy support from Beijing. While German machinery exports to BRIS countries (BRICS excluding China) and ASEAN are down 23 percent and 14 percent, respectively, compared to 2019, Chinese machinery exports have risen by 89 percent and 31 percent. China has also gained market share in Europe, which accounts for two-thirds of German exports, at Germany’s expense”.

Noah Barkin and Gregor Sebastian notes “China’s export competitiveness has been driven by several factors”. First, “China is catching up technologically in many high-tech industries. According to a recent survey from the German Chamber of Commerce in China, 51 percent of German firms operating in China believe Chinese competitors will become innovation leaders in their sector within the next five years, up from 36 percent in 2018. In the automotive sector, 69 percent of respondents consider Chinese companies already leading or ahead within the next five years”. Second, “overcapacity driven by massive capital investment in new production sites and slowing domestic demand”. Third, “subsidies and below-market inputs for energy and financing as well as strong policy support for exports. China’s state-owned export credit insurer Sinosure and policy bank Eximbank have in recent years ramped up export support for Chinese manufacturing companies and BRI projects generate overseas demand for Chinese products”. “Third-market competition from China will affect all of Germany’s important export sectors and impact small and large firms…the largest impact on Germany’s value added as Germany’s manufacturing sector is highly export-oriented and although China is an important market, it is only one of many”.

Noah Barkin and Gregor Sebastian thinks “current dynamics are likely to hit Germany where it hurts most: in the automotive, machinery and electrical equipment industries. This new era of competition is emerging against the backdrop of a stagnating German economy, a more polarized political environment, and growing signs of social and labor unrest. German manufacturing jobs are being lost due to Chinese competition and a shift of corporate investment out of Germany and into China. This volatile cocktail increases the risks of a broader backlash against China – similar to the dynamic that emerged in the US over a decade ago as manufacturing jobs vanished – that includes more German companies and the hundreds of thousands of workers they employ. Until now, German pushback against China has been largely a top-down phenomenon, driven by government concerns about resilience and security. In the future, the economic relationship is likely to become a greater source of tension, with industrial actors supporting rather than obstructing a more robust policy. A broader backlash would have important implications for Europe’s positioning on China, given the centrality of Germany in the EU-China relationship. Going forward, we expect Berlin to take a more active role in pushing back against China’s unfair trade practices, promoting more ambitious industrial policies in Europe, and embracing other EU-led measures to level the economic playing field”.

European Union Chamber of Commerce in China President Jens Eskelund [30] warned “something will need to change because Europe cannot just accept that strategically viable industries constituting the European industrial base are being priced out of the market…That is where trade becomes a security question.” The chamber said in a report on navigating security risks in China “that overcapacity has distorted competition in the EU. Brussels has also complained about its substantial trade deficit with China and Beijing’s slow progress in opening market access. The EU trade deficit with China hit a decade record €397 billion (US$423 billion) in 2022 before falling to €291 billion last year”. “It is hard for me to imagine that Europe will sit by quietly and witness the accelerated deindustrialisation of Europe because of the externalisation of low domestic demand in China,” Eskelund said. “In terms of alleviating some of this pressure, there needs to be perhaps a little bit more focus on the demand side in China to create that demand that will make China less of a perceived threat.” Much more honest conversations are needed between China and Europe, as solutions are required to address the unfolding of a slow-motion train accident”. “The report said that during China’s self-reliance push, some imports have been replaced by Chinese or China-based suppliers following provincial or municipal incentives or pressure, which have put European firms at distinct disadvantagesIn some sectors deemed integral to China’s national security, policymakers have gone a step further, issuing explicit directives to replace foreign components and technologies with domestic ones, the report said, listing procurement rules in IT hardware and medical devices. With the increasingly complex geopolitical environment Chinese policymakers see operating in, the chamber suspects that China is likely to expand its toolkit to address a growing number of matters regarding national security. But to create a more sustainable environment for foreign businesses, the chamber said China should steer away from excessive self-reliance and mitigate economic risks in a surgical and precise manner. China should “refrain from erratic policy shifts or punishing companies for the actions of their home governments”, while “develop nuanced strategies for strengthening supply chains that do not err towards trade protectionism…the chamber…also called on China to “engage in dialogue with other governments and key stakeholders to depoliticise the business environment”.

It is illustrative to compare China’s and Japan’s experience in the global car industry. Japan’s car industry[31] expanded rapidly from the 1970s. By the 1980s, the Japanese manufacturers gained a major foothold in world markets by producing affordable and reliable cars. Given the threat to their car industries, several European countries imposed import quotas. The Japanese government also agreed to annual export quotas with the US in 1981. To bypass these quotas, Japanese manufacturers established plants across North America and Europe while exporting from plants in third countries not affected by the quotas.

China is already the world’s largest producer of cars by virtue of the size of its domestic market and recently overtook Japan as the largest exporter. In contrast with Japan, the protectionist pushback from US and Europe is stronger for geopolitical reasons. Apart from the threat of higher tariffs, Chinese car manufacturers could possibly be subject to national security barriers. Unlike the Japanese, the Chinese would likely not be welcomed to establish factories in US and parts of Europe.

Japan had little choice then but to submit to Western demands. China is in a different position as it has a strong bargaining card. Western car manufacturers (including Japan and Korea) have a large presence in China and their access to the world’s largest car market could be imperilled should they block Chinese exports. Thus, China is unlikely to be passive like Japan and would likely retaliate. China is now attacking global markets (with the exception of the US) to make as much inroads as possible before protectionist barriers are finally imposed.

Japan’s car industry success was largely driven by efficiencies in costs and quality. China’s success is based on a disruptive business model[32] involving new technologies (EV batteries and AI), new architecture (fewer parts), innovative production processes, and shortened product cycles. Backstopped by government support, China’s dominance of the EV supply chain and industry scale, China’s production costs of EV cars are starting to fall below the costs of ICE cars. US-based Tesla started a price war and its Chinese competitors have followed suit. Western car manufacturers seem at a loss to respond to the China-led competition. Among the Western car manufacturers, only the Koreans seemed to have achieved some EV success. Some major Western car companies seem to have decided to mothball their unprofitable EV operations and stick to ICE and hybrid technologies. But eventually, they have to face up with overhauling their legacy operations (suppliers). The economic costs of stranded ICE assets from writing off obsolescence costs and shrinking the supply chain and workforce will be substantial. Protecting legacy operators would only worsen the long-term costs. The West will need to manage the creative destruction of their legacy car industry.

Gary Clyde Hufbauer notes “globally, the auto industry employs some 14 million workers who manufacture $3 trillion worth of vehicles annually. The European Union’s industry employs about 2.5 million workers, while the United States, Mexico and Japan each employ about 1 million workers. Jobs outside China are evidently under threat, though China’s own 4 million auto workers are also at risk of losing their jobs. In 2022, global car exports were worth $780 billion, more than a quarter of world production. The European Union led the export parade with $407 billion, followed by Japan with $87 billion, the United States at $58 billion, South Korea at $52 billion and Mexico with $47 billion. China was ranked in 6th place with $45 billion worth of exports – roughly 40% of which were Teslas. Still, Chinese exports grew more than 80% in 2022, and that’s just the beginning”.

Balancing the global economy

From a national income accounting perspective, trade-offs are required. Michael Pettis argues “if China’s GDP is to continue growing at 4-5 percent for the next decade, either other major economies must be willing to reduce their economies’ investment and manufacturing shares to accommodate China or China must establish policies that cause the locus of growth to shift from investment to domestic consumption”.

He believes it is unlikely China will increase consumption substantially. Michael Pettis notes World Bank statistics show “China’s $18 trillion economy accounts for just under 18 percent of global GDP, making it the world’s second-largest economy after the United States, which accounts for about 25 percent. But China comprises only 13 percent of global consumption and an astonishing 32 percent of global investment. These rates are hard enough to sustain without surging debt…They would be even harder to sustain if China’s share of global GDP rose. This is where global constraints matter more than ever before: if China maintained its high investment share of GDP and GDP grew at rates of 4-5 percent for the next decade, China’s share of global GDP would rise by less than 3 percentage points, to 21 percent, while its share of global investment would rise by more than 5 percentage points, to 38 percent. Its share of global consumption, however, would rise by well under 2 percentage points, to less than 15 percent. Can China really account for 38 percent of global investment while its economy comprises just 21 percent of global GDP and 15 percent of global consumption? Every $1 of investment has required approximately $3 of consumption globally to sustain it during this century. In China, however, $1 of investment is balanced by only $1.30 of consumption. If the global relationship between consumption and investment held over the next decade, an increase in the Chinese share of global investment from 32 percent today to 38 percent in a decade would require that the rest of the world disinvest to accommodate China’s domestic imbalances. To give a sense of just how extreme this requirement is, it would mean that to prevent a global overproduction crisis (which would hit China especially hard), the rest of the world would have to agree to reduce the investment share of its GDP by roughly 1 full percentage point, to 19 percent of GDP, well under half of the Chinese level. Needless to say, this is very unlikely…What’s more, to the extent that the surge in China’s debt burden is driven by its extraordinarily high investment share of GDP, it would require China’s debt-to-GDP ratio to rise from just under 300 percent today to at least 450-500 percent in a decade…Given…the difficulties Beijing has had in its attempts to reduce the debt burden, it is hard to imagine that the economy could tolerate such a substantial increase in debt”.

Michael Pettis points out the next few years these “constraints are likely to become extremely tight. If they set off a global trade conflict involving the United States, the EU, India, and Japan, the results would be especially painful for countries such as China that rely on large trade surpluses to balance weak domestic demand with an overreliance on manufacturing to drive growth”. “There are basically three ways deficit countries can respond to beggar-thy-neighbor policies in surplus economies. They can aggressively subsidize their own manufacturing sectors and try to pass the cost on to trading partners (in other words, retaliate with their own beggar-thy-neighbor policies); they can opt out of the existing global trade regime, either unliterally or with other like-minded countries; or they can accept rising debt or unemployment and a further erosion of the role of manufacturing in their economies. The first option would lead to a global overproduction (or underconsumption) crisis like that of the 1930s, the second option would disrupt the global trade regime, and the third option would likely be politically unacceptable. Probably the best response for the United States and the world in the medium and long term would be for the United States to intervene to reverse the beggar-thy-neighbor polices of the surplus nations – the second option. In that case, the United States either unilaterally or with other like-minded countries would implement trade policies to prevent surplus countries from externalizing the costs of their industrial policies (in other words, from running persistent trade surpluses). This could be done either with restrictions on the ability of surplus countries to dump goods into the U.S. economy or with restrictions on the ability of surplus countries to dump excess savings into the U.S. financial system. The most obvious of the former policies are tariffs, and the most obvious of the latter are taxes on capital inflows”.

However, Michael Pettis argues “that for all the talk of reshoring and friendshoring, the U.S. trade deficits cannot decline as long as surplus economies can continue to acquire assets in the United States with the proceeds of their surpluses. The United States, in other words, has no choice but to run deficits to balance the surpluses of the rest of the world… Foreign inflows instead force adjustments in the U.S. economy that result in lower U.S. savings, mainly through some combination of higher unemployment, higher household debt, investment bubbles, and a higher fiscal deficit”.  In this context, “to rebalance its economy toward manufacturing while reining in debt and generating higher-paying employment, the United States must either transform the global trading regime or unilaterally opt out of its current role…This won’t be easy, however. Any meaningful resolution of global trade imbalances will be strongly opposed by surplus countries and would result in a diminished global role for the U.S. dollar”.

Michael Pettis cautions “there are conditions under which an expansion of global trade leads to an expansion of global production, mainly because under those conditions trade allows resources to be shifted to their most productive uses and businesses to exploit economies of scale. If the increase in production is distributed efficiently between consumption and savings, more exports automatically lead to more imports, and all parties are better off. But there are also conditions in which an expansion of global trade suppresses global consumption through what in the 1930s used to be called beggar thy neighbor policies. When this happens, either global production must also contract and global unemployment rise or total demand must be maintained by rising debt”.

Michael Pettis notes “the current global trading regime is very different. Not only has it been characterized in the past several decades by huge, persistent trade imbalances that don’t seem to self-correct, but, even more perversely, excess savings are generated in both advanced and developing economies and are mostly directed to a handful of advanced, capital-rich economies – with the United States, the United Kingdom, Canada, and Australia typically absorbing 60-80 percent of the total”. Yet, “foreign capital won’t cause investment to rise if it flows into advanced economies in which business investment isn’t constrained by scarce capital. In fact, it may actually cause business investment to decline if business investment is constrained mainly by demand, as is the case in most advanced economies. In that case, to the extent that the accompanying trade deficit reduces demand for local producers, local producers may actually reduce investment. This seems clearly to be the case for foreign inflows into the United States. It has been a much-discussed (and criticized) characteristic of the U.S. economy that American businesses sit on huge piles of cash and cash equivalents ($6.9 trillion, or 12 percent of total assets, according to one recent study), even after engaging in record levels of acquisitions and share buybacks. In that case, making even more (foreign) savings available for American businesses is unlikely to increase investment, especially if the increase in foreign inflows is the obverse of an increase in the U.S. trade deficit”.

The China that can say no – Economic war and role of MNCs

In 1989, Shintaro Ishihara and Akio Morita penned a famous essay “The Japan that can say no: Why Japan will be first among equals”[33]. It was famous for its criticisms of US business practices and for advocating an independent foreign policy stance. Ishihara espoused the superior education and character of Japanese workers, advocated Japan leverage its technological superiority to negotiate with the US, and to end the US-Japan security pact to end reliance on the US. Morita asserted American business were too preoccupied with “money games” and short-term profits and executive pay was excessive. He attributed Japan’s trade surplus with US to the latter’s weaknesses in product development and marketing. He argued US failure to recognize Japan’s importance will hurt US and world economy and that Japan should be conscious of its role as a world leader and do its part to support the world economy – including building up Asia to strengthen its position as a regional economic leader and to give more foreign aid.

Japan eventually capitulated to US pressure. Losing sight of its global aspirations and re-focusing instead on domestic restructuring may explain why Japan lost ground globally – falling from No.2 to No.4 and probably No. 5 by the end of this decade – while its share of global GDP has shrunk from 18% to 5%. On the other hand, Japan’s economic sacrifices made it possible for peaceful co-existence among developed economies and laid the groundwork for hyper-globalisation. In turn, globalisation-driven growth helped to keep Japan’s depression relatively benign.

Today, China’s rise is similarly threatening Western economic stability. China is choosing to say no to the West. China thus continues to expand industrial capacity and this is crowding out Western players in the Chinese and global markets. Rebecca Arcesati notes “the EU, US and others have grown uneasy with China’s dominance in the value chains of many products needed for their low-carbon transition, such as batteries, high-performance magnets, electric vehicles (EVs), solar photovoltaic (PV) modules, and fuel cells. Losing this indispensability would erode China’s strategic and geoeconomic leverage. If G7 economies want to de-risk from China, Beijing will not let them do so easily with raw materials and technology it supplies. China enjoys a strong upstream advantage in many areas, like graphite, of which it is the world’s top producer and exporter. In October, MOFCOM announced some changes to existing dual-use licensing requirements for some types of graphite. In the past, China reportedly already withheld some graphite exports from Swedish producers of lithium-ion battery cells. The new measures specify synthetic graphite, needed for battery production, just weeks after the European Commission announced an anti-subsidy investigation into imports of battery EVs from China. Retaliation and the defense of industrial interests can go hand in hand. Crucially, supply chain security goes beyond raw materials. It also includes technology and intellectual property required in mining, refining, and manufacturing processes. In proposed amendments to its Catalogue of Technologies Prohibited and Restricted from Export, Chinese authorities initially mulled new licensing requirements for technology needed to make solar wafers for PV panels. They then dropped those changes in the final version of the amended catalogue, but proceeded to ban the export of technology used to process rare earths and manufacture magnets from them”. In short, China will use “export controls to prevent others from building alternative supply chains that threaten its industrial and technological leadership”.

Unfortunately there doesn’t seem to be a middle ground. It is impractical for China to stop midstream investing in modernisation or to hold back the international expansion of its domestic firms. If China cuts any slack by prioritising consumption or accept trade restrictions, the West will take advantage to accelerate reshoring and reindustrialisation to challenge China’s manufacturing dominance. China cannot compromise on its goals of technology self-sufficiency; otherwise China will never be independent of the economic power of Western nations and will remain an also-ran to the US. The reality is that much of decoupling is irreversible. China and the West are set on a collision course and is turning the economic race into an economic war.

The West is thus still struggling to find an appropriate response to the China threat for several reasons. First, it is a fallacy that China’s economic advances is dependent on Western markets and technology. Second, over time, decoupling will reduce interdependence between China and the West to a point where it becomes inconsequential. Towards this end, China is beefing up its trading relationships with the Global South to counter the weakening relationship with the West. David P. Goldman notes “China’s exports rose year-on-year by 10.3% in RMB, driven by 20% to 40% jumps in exports to India, Brazil, Indonesia, Vietnam, South Africa and other countries of the Global South. This more than compensated for sharp declines in shipments to developed markets including the US (-7%), the European Union (-6.8%), and Japan (-2.5%). The biggest gains were registered in BRICS members India (+16%), Brazil (+37.1%), and South Africa (14.8%), as well as Vietnam (+28.4%) and Indonesia (+22.2%)”. “China’s exports to the Global South surpassed exports to all developed markets during late 2022 and 2023…The preliminary January-February data show that this trend is accelerating. Chinese investment in the Global South through the Belt and Road Initiative as well as private channels explains part of this success”.

While governments lead the policy charge in fighting economic wars, the outcomes are determined by MNCs[34]. Even at its peak, Japan was at a disadvantage as few MNCs established operations there due partly to the prohibitive costs and partly due to the difficult market conditions. In contrast, MNCs aspiring to be global leaders need to be in China to gain access to the Chinese consumer, industrial ecosystem and talent, and to keep up with latest competitive and innovation trends. In this context, the West’s ostracization and protectionist strategies are self-defeating in that they limit their geographical scope of their MNC operations (markets), and hurt their ability to source from the cheapest and best suppliers. This makes it difficult for Western firms to out-innovate and outcompete Chinese firms. In contrast, Chinese MNCs enjoy substantial government support and tend not to worry about profits whereas the market-oriented and VC-funded Western firms have short-term profit time horizons.

The Western advantage is its strength in finance and information services. The US economy is financialised; hence it has substantial ability to leverage liquidity (and lower its cost of capital). But financialisation is a double-edge sword. Financialisation can be a disadvantage in that it elevates inflation and cost pressures. The lack of cost competitiveness will stymie efforts to reindustrialise and to compete in export markets. It may not be possible for economies to be financialised and industrialised at the same time. It is worth noting that in the 1990s, Japan’s international cost advantage was diminished by a massive currency revaluation. In contrast, China’s cost competitiveness is being reinforced by domestic deflation, currency depreciation and inflation in Western countries.


We are almost at the halfway point in the race to be the world’s largest economy in 2030. Both economies are in the midst of geopolitical-motivated transformation to gain a strategic advantage going into the final stretch. The US is decoupling and reindustrialising. China is swapping growth engines, replacing property and exports with one powered by new technologies.

China’s strategic aims are to achieve technological break-throughs, unlock new sources of domestic and international (export) growth, and maintain financial stability. This will allow China to hold its own against the West. At the moment, the US has settled on a defensive strategy by leveraging on its military, finance and technological global strengths and marshalling its allies to join its efforts to contain China’s rise. But containment is a second-best and probably obsolete strategy in today’s fast-paced world. China can easily find ways to bypass containment while allies could waver as the costs of their economic sacrifice mount. At the end of the day, US and its allies need forward-looking plans to outrun and outcompete China in the economic race, to spawn the next wave of global MNCs, and to improve the livelihoods of their citizens. In this regard, where once there was no challenger to the US economic model, today the world mostly adopts China’s blend of industrial policies and technology leapfrogging.

Winning the economic race may not matter all that much if countries are unable to win the economic war. The fight for control of resources, global supply chains, technology, markets and international relationships is becoming more crucial as the global economy fragments. Yet, the intensifying conflict is accentuating the beggar-thy-neighbour dynamics which poses a threat to global economic and financial stability. If they fail to coordinate and cooperate, US and China will jointly suffer the consequences of economic and financial contagion together. It may also be an error to frame the contest for economic supremacy as a two-horse race. The growth momentum is shifting in favour of other large Global South economies like India, Indonesia, Mexico and Vietnam. In a multipolar future, the economic share and influence of US and China is likely to shrink.

Finally, US’s recent strong performance and China’s stumble has raised American hopes that not only is China unlikely to overtake the US by 2030, China could suffer the fate of Japan, where having reached a similar point, its challenge faded away as its economy becomes mired in stagnation. I examine this issue in greater depth in the next article.


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Global Times (29 January 2024) “Chinese vice premier calls for more support for high-quality development of listed firms to help stabilize capital market”.

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[1] See Han Feizi.

[2] See Frank Chen.

[3] See Amanda Lee.

[4] See Austin Jordan; Arthur Kroeber.

[5] See Derrick A Paulo and Pearl Forss.

[6] See Derrick A Paulo and Pearl Forss.

[7] See Derrick A Paulo and Pearl Forss.

[8] See William Pesek.

[9] See William Pesek.

[10] “Snowballs are derivatives that promise sizeable interest payments as long as the underlying stock indices trade within a certain range. Once the index breaches a pre-set lower limit, it will trigger a so-called knock in that leaves holders with substantial losses”. See Wang Juanjuan, Yue Yue, Quan Yue and Denise Jia.

[11] “Global reset – Economic decoupling (Part 1: China’s socialism big bang)”.

[12] Examples cited by Bloomberg include Missouri State Employees’ Retirement System and Federal Retirement Thrift Investment Board.

[13] In tandem with this, Berkshire Hathaway has sold down its 25% stake (purchased in 2008) in Chinese EV maker BYD to below 8%. Theron Mohamed thinks the sales are “surprising given both Buffett and Munger have hailed BYD as a truly special company this year…A big reason that Berkshire has been cashing in its BYD stock may be geopolitics…the reason why they dumped Taiwan Semiconductor only a few months after buying it”.

[14] See “Global reset – Monetary decoupling (Part 7: Currency wargame scenarios)”; “The dismal decade (Part 1: De-dollarisation and currency landscape in 2030)”.

[15] The narratives of central banks and Wall Street support the supply of liquidity and profits to markets and the finance industry.  See  “Policy conversations and the language of information”.


[17] Mr. Market is an allegory created by Benjamin Graham in his 1949 book The Intelligent Investor to describe the irrational stock market and the risks of groupthink. Graham was advocate of fundamental analysis and investing based on intrinsic value.

[18] See Brad W. Setser on China’s new approach to defending its currency.

[19] See Aileen Chuang and Peggy Sito.

[20] See Aileen Chuang and Peggy Sito.

[21] See Aileen Chuang and Peggy Sito.

[22] Hukous, granted by cities, are permits that allow urban residents to access social services like education, healthcare and retirement benefits.

[23] See Bloomberg “What buzzwords from China’s key political meeting reveal, from AI Plus to New Three”.

[24] See Ya-Wen Lei on Techno-capitalism;

[25] See Keyu Jin; “Global reset – Economic decoupling (Part 1: China’s socialism big bang)”; “The China model (Part 1: A balanced perspective)”; “China’s model (Part 2: Digital China and the information society)”

[26] See Reuters.

[27] Alexander Brown, Jeroen Groenewegen-Lau, Antonia Hmaidi “New roadmap for future industries + Data as a factor of production + Auto chips”; Barry Naughton “Re-engineering the innovation chain: How a new phase of government intervention is transforming China’s industrial economy”; and Jeroen Groenewegen-Lau “Whole-of-nation innovation: Does China’s socialist system give it an edge in science and technology?”.

[28] Alexander Brown, François Chimits and Gregor Sebastian note in 2018, Beijing launched the Little Giants initiative modelled on a German initiative help promising companies grow into leaders and develop key technologies. Provincial governments identified 98,000 Specialized SMEs, while national authorities selected more than 12,000 as candidates operating in the ten priority sectors from the Made in China 2025 plan. These include computer numerical control (CNC) machining, electric vehicles, or medical devices. Additional evaluation criteria include a company’s potential to replace imports or to secure a significant global market share in innovative niche products. Government-backed firms benefit from increased cooperation with large companies, to help them fill supply chain gaps, as well as with universities on research and development (R&D). They are supported in intellectual property matters – and, above all, financially supported. The state acts as a patient investor to early-stage high-tech SMEs by leveraging government guidance funds and through favorable loans from state-owned banks, which serve Little Giants in specially created departments. Companies can also more easily raise capital on the stock markets thanks to simplified listing requirements. In 2022, 40 percent of listings on the Shanghai, Shenzhen and Beijing stock exchanges were made by Little Giants. This poses a challenge to European companies which could lose market share in China and globally. The EU’s exports to China are worth EUR 230 billion in total and are heavily concentrated in machinery, vehicles and other manufactured goods. About 40 percent of that could be threatened by Chinese competitors.

[29] See Camille Boullenois, Agatha Kratz and Daniel H. Rosen.

[30] See Luna Sun.


[32] For more on the EV industry, see Ilaria Mazzocco; Robert Ferris; and


[34] See “Global reset – Economic decoupling (Part 5: Growing divergence between governments and MNCs)”; “The Great Economic War (GEW) (Part 9: The geopoliticisation of MNCs)”.